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Ashley Maready
Buying a home is an expensive prospect. You have to come up with a down payment, pay for movers, and buy furniture for your new home. But there's another expense many home buyers forget to account for: closing costs on a mortgage.
Closing costs aren't universal. Each mortgage lender sets its own fees that are then passed on to borrowers when they finalize their home loans. Typically, closing costs range from 2% to 5% of a borrower's loan amount. Your loan estimate should include your closing costs so you know what fees to expect. In fact, your lender should break down each fee for you in your closing disclosure so you know everything you're paying for.
The good news is that as a borrower, you usually don't need to come up with a check for your closing costs when you sign your mortgage. You could go that route, but you often get the option to roll those fees into your mortgage and pay them off with the rest of your loan. This applies to new home purchases and refinances. The question is: Which is the better choice?
Should you pay closing costs upfront?
The upside of writing a check for your closing costs when you finalize your mortgage is that you don't have to take on more debt when you buy a home. If you roll your closing costs into your loan, you pay interest on them. Pay them upfront, and you don't, which keeps your monthly payment lower.
On the other hand, if money is tight and you're already spending a lot of your savings on a down payment, you may be better off rolling closing costs into your loan. Also, if you've managed to secure a low interest rate on your mortgage, it may not hurt to add an extra few thousand dollars into your home loan.
How to lower your closing costs
The less you have to spend on closing costs, the smaller the check you have to write, or the less you add to your mortgage loan balance. That's why it's wise to keep your closing costs to a minimum. You can do so in a number of ways:
- Shop around for offers. You may find that one lender offers lower closing costs than another.
- Negotiate with the lender you choose. Your lender may be willing to lower certain fees (say, the application fee or origination fee) in order to gain your business.
- See if your seller will pay some or all of your costs. In a normal housing market, it's not uncommon for buyers to ask sellers to pick up some or all of their closing costs. Sellers are often willing to do so if they want to secure the offer they've received. But this strategy may not work right now, because it's a seller's market.
Keep in mind that while a strong credit score may help you snag a low interest rate on your mortgage, it won't necessarily mean you qualify for lower closing costs on that home loan.
What's the right call for you?
No matter how much you end up spending on closing costs, think about the best way to pay those fees. If you can afford the extra money at closing, you may decide to just fork it over and be done. But if you'd rather keep more money in savings, you may want to roll closing costs into your mortgage instead. This holds especially true if you're buying a home that needs a lot of work. You may need that money in the near term to get it into better shape.
Still have questions?
Here are some other questions we've answered:
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FAQs
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How much of your closing costs can be rolled into your mortgage are limited by two factors: how much your home appraised for and your mortgage program. A lender won't lend more than your home is worth, capping your maximum rolled into closing costs to how much your mortgage company will lend on your home.
The loan program also influences this figure. For example, a conventional mortgage may allow 3% to 9% of your home's value to be paid in closing costs by the seller, while an FHA loan will cap their contribution at 6%.
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In the vast majority of cases, there is no difference. Most loan programs will only allow closing costs to be included in the loan if they're the result of a seller credit. In a few cases, you may be able to get a lender credit by paying more interest to the lender, but this is not nearly as common in practice.
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Maurie Backman is a personal finance writer who covers topics ranging from Social Security to credit cards to mortgages to REITs. She also has an editing background and appears on live podcasts to talk about financial matters.
Kristi Waterworth has been a writer since 1995, when words were on paper and card catalogs were cool. She's owned and operated a number of small businesses and developed expertise in digital (and paper) marketing, personal finance, and a hundred other things SMB owners have to know to survive. When she's not banging the keys, Kristi hangs out in her kitchen with her dogs, dropping cheese randomly on the floor.
Fact Checked
Ashley Maready
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
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