Closing costs can be a heavy financial burden when you’re ready to buy a home or refinance your mortgage. With every home purchase or refinance, closing costs are part of the mix. For new homebuyers especially, deciding how to pay closing costs can be overwhelming and stressful.
All that said, you definitely have options! An experienced mortgage broker can help you decide how to structure your home loan to help cover closing costs and keep your financial goals on track.
What options do I have to pay closing costs?
Closing costs are a one-time expense that every homeowner pays when you refinance a mortgage or buy a new home. The two biggest financial responsibilities that homeowners face with a new mortgage are the down payment and closing costs. While every mortgage will have closing costs, you can decide how you want to pay them. This is how mortgage lenders can offer “no-cost loans” or “zero-cost loans.”
How to pay for closing costs on a new mortgage:
- Pay closing fees out-of-pocket when your loan closes
- Roll the closing costs into your new mortgage
- Pay a slightly higher rate to have your lender pay closing costs
- Work with the seller to pay partial closing costs
Closing costs typically cost 3-5% of the total amount of your new mortgage. These fees often include appraisal fees, title insurance, property taxes, credit report fees, origination fees, and discount points. Check this out for a complete list of what to expect for closing costs.
When closing costs are covered by the lender (what to expect)
No-closing cost or zero-cost home loans typically fall into this category. In this scenario, the mortgage lender covers your closing costs upfront. In exchange, you’ll have a slightly higher mortgage rate, which gives the lender a higher return over the life of the loan.
For the homeowner, this offers a few advantages. It’s less money out of pocket, you’ll have more cash reserves for home repairs and property taxes, and it can help you become a homeowner sooner. What’s more, you’ll be able to start building home equity right away.
When closing costs are rolled into your mortgage (what to expect)
Rolling closing costs into your mortgage is a different strategy. When you roll your closing costs into a new home loan, it doesn’t always affect your interest rate. Instead, the total amount of closing costs will be added to your mortgage, increasing the total loan amount.
Rolling the closing costs into your home loan will increase the total amount of your mortgage. However, your monthly payment will only be slightly higher since the closing costs will be spread over the life of the loan. Just be aware that you’ll be paying interest on your closing costs for the entire loan term. For many homeowners short on cash, it can be worth it to become a homeowner sooner and start building equity.
What to do if you can’t afford closing costs
For some homeowners, adding the closing costs to the loan will push the mortgage balance beyond what they can afford. Or a homeowner might not qualify for the type of loan that allows the lender to pay the closing costs.
Borrowers with low income or moderate income can apply for grants through HUD-approved agencies to help pay closing costs. If you think you could qualify, talk with an experienced mortgage broker. We can provide information that can help.
There are a number of ways to save money on your mortgage. You can decide to pay mortgage points to lower your rate, make a bigger down payment, or negotiate with the seller to cover some of the closing costs. It’s a wise move to talk to your mortgage broker to decide the best way to cover your closing costs. You can roll them into your mortgage, pay your closing costs out of pocket, or have your mortgage lender cover the costs in exchange for a higher interest rate.
Deciding how to pay for closing costs on a new mortgage is a big decision. The financial advantages can seem complicated, but refinancing your mortgage or buying a new home doesn’t need to be stressful. We work with new homeowners and happy clients at every stage of homeownership. Our goal is to get you the best mortgage and save you money along the way. Give us a call to get started.