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Can I Roll Closing Costs Into My Mortgage to Reduce My Upfront Expenses?

Buying a home is an exciting milestone, but it also comes with a range of upfront costs that can add up quickly. One of the biggest financial concerns for many homebuyers is closing costs. These expenses, which typically range from 2 to 5 percent of the home’s purchase price, can put a strain on your budget. If you are wondering whether you can roll your closing costs into your mortgage to reduce your upfront expenses, the answer depends on the type of loan you are using and your lender’s guidelines.

Understanding your options can help you make the best financial decision while keeping your home purchase affordable.

What Are Closing Costs?
Closing costs are the fees and expenses required to finalize your home purchase. They include charges for services such as loan origination, appraisal, title insurance, and escrow fees. While some costs are negotiable, most are necessary to complete the transaction. Common closing costs include:

  • Loan Origination Fees – Charged by the lender for processing the mortgage application.
  • Appraisal Fees – Paid to a professional appraiser to determine the home’s market value.
  • Title Insurance – Protects against potential ownership disputes or legal claims.
  • Escrow and Prepaid Costs – Includes homeowners insurance, property taxes, and prepaid interest.
  • Attorney Fees – In some states, an attorney is required to handle the closing process.

These costs can add up quickly, making it difficult for some buyers to come up with the necessary funds upfront.

Can Closing Costs Be Rolled Into a Mortgage?
In some cases, you can roll closing costs into your mortgage to reduce your out-of-pocket expenses. However, this depends on the type of loan you are using and whether your home’s value can support the increased loan amount.

Rolling Closing Costs into a Purchase Loan
For conventional, FHA, and VA loans, rolling closing costs into the mortgage is generally not allowed. Lenders set loan limits based on the appraised value of the home or the purchase price, whichever is lower. This means that closing costs must usually be paid separately and cannot be added to the loan amount.

However, there are alternatives to reduce upfront costs, such as:

  • Lender Credits – Some lenders offer credits in exchange for a slightly higher interest rate, reducing your upfront costs.
  • Seller Concessions – The seller may agree to cover some or all of the closing costs as part of the negotiation.
  • Down Payment Assistance Programs – Some local and state programs offer grants or low-interest loans to help with closing costs.

Rolling Closing Costs into a Refinance Loan
If you are refinancing your home, rolling closing costs into the loan is much more common. In a rate-and-term refinance, lenders often allow closing costs to be included in the new loan balance as long as the total loan amount does not exceed the home’s appraised value. This option helps borrowers refinance without needing a large upfront payment.

For a cash-out refinance, closing costs are typically included in the new loan, as the borrower is taking out additional equity from the home. However, this results in a higher loan balance and potentially higher monthly payments.

Pros and Cons of Rolling Closing Costs into Your Mortgage
While rolling closing costs into your mortgage can reduce your upfront expenses, it is important to weigh the advantages and disadvantages.

Pros

  • Reduces Immediate Out-of-Pocket Costs – Helps buyers who may not have enough cash saved for both the down payment and closing costs.
  • Keeps More Cash on Hand – Allows buyers to reserve savings for home improvements, moving expenses, or emergency funds.
  • Simplifies the Homebuying Process – Avoids the stress of coming up with additional funds at closing.
    Cons
  • Higher Loan Balance – Increases the total amount borrowed, leading to higher monthly payments and more interest paid over time.
  • Potential for a Higher Interest Rate – If lender credits are used, the interest rate may be slightly higher than a loan with full upfront closing costs.
  • Limited Options for Purchase Loans – Most purchase loans do not allow closing costs to be added directly to the loan amount.

Alternatives to Cover Closing Costs
If rolling closing costs into your mortgage is not an option, there are other ways to reduce upfront expenses:

  • Negotiate with the Seller – Ask the seller to cover part of the closing costs, especially in a buyer’s market.
  • Choose a No-Closing-Cost Mortgage – Some lenders offer a no-closing-cost option in exchange for a slightly higher interest rate.
  • Use Gift Funds – Many loan programs allow buyers to use gift funds from family members to cover closing costs.
  • Look for Assistance Programs – Many state and local programs offer financial assistance for homebuyers struggling with upfront costs.

Is Rolling Closing Costs into Your Mortgage the Right Choice?
Deciding whether to roll closing costs into your mortgage depends on your financial situation and long-term goals. If keeping upfront costs low is a priority, exploring lender credits, seller contributions, or assistance programs may be a better solution. However, if you are refinancing and have enough home equity, rolling closing costs into your loan can be a convenient way to avoid out-of-pocket expenses.

Before making a decision, speak with a mortgage professional to review your options and determine the best approach based on your financial needs. Every borrower’s situation is different, and understanding how closing costs impact your overall mortgage can help you make an informed choice.

Should You Use a 401(k) for a Down Payment?

Buying a home is a major financial milestone, and saving for a down payment can be one of the biggest challenges. If you’re struggling to gather the necessary funds, you might be considering using your 401(k) retirement savings to cover the cost. While this option is available, it’s essential to weigh the potential benefits and risks before making a decision.

How Can You Use a 401(k) for a Down Payment?
There are two primary ways to access funds from your 401(k) for a home purchase:

401(k) Loan
A 401(k) loan allows you to borrow money from your retirement savings and pay it back over time, usually with interest. Here’s how it works:

  • You can typically borrow up to 50 percent of your vested balance, with a maximum of $50,000.
  • The repayment term is usually five years, but some plans offer extended terms for home purchases.
  • Interest rates are generally low since you’re paying the interest back to yourself.
  • Payments are made through automatic payroll deductions.

Pros of a 401(k) Loan:

  • No impact on your credit score since it’s not a traditional loan.
  • Lower interest rates than personal loans or credit cards.
  • You repay yourself rather than a lender.

Cons of a 401(k) Loan:

  • If you leave your job, the loan may become due in full within a short period (usually 60 to 90 days).
  • Reduces your retirement savings and potential investment growth.
  • Loan payments are made with after-tax dollars, meaning you pay taxes on the money twice (once when repaying and again at withdrawal in retirement).

2. 401(k) Hardship Withdrawal
Some employers allow hardship withdrawals for a first-time home purchase. Unlike a loan, this is not repaid, but there are significant downsides:

  • The withdrawal is subject to income tax.
  • If you’re under 59 and a half years old, you may face a 10 percent early withdrawal penalty.
  • You permanently reduce your retirement savings and potential future earnings.

Pros of a 401(k) Withdrawal:

  • No repayment required.
  • Provides immediate access to funds.

Cons of a 401(k) Withdrawal:

  • Subject to income tax and possible 10 percent penalty.
  • Permanently reduces retirement savings and potential long-term growth.
  • Could impact your financial security in retirement.

Is Using a 401(k) for a Down Payment a Good Idea?
While using a 401(k) loan may be a better option than a hardship withdrawal, both have significant drawbacks. Before making a decision, consider these factors:

Do You Have Other Options?

  • Explore low down payment mortgage programs like FHA (3.5 percent down), VA (0 percent down for eligible veterans), or conventional loans with 3 to 5 percent down.
  • Look into down payment assistance programs that may be available in your area.
  • Consider tapping into other savings (IRAs, Roth IRAs, or taxable investment accounts).

Can You Afford the Repayments?

  • A 401(k) loan reduces your take-home pay since repayments are deducted from your paycheck.
  • If you leave your job, you may have to repay the loan quickly or face taxes and penalties.

Will It Set You Back in Retirement?

  • Taking money out of your 401(k) can impact your long-term financial security.
  • If your employer offers 401(k) matching, ensure you’re still contributing enough to get the full match.

Alternatives to Using a 401(k) for a Down Payment

  • Save for a larger down payment over time.
  • Use a Roth IRA, which allows penalty-free withdrawals for first-time homebuyers.
  • Consider gift funds from family members, which are allowed on many loan types.
  • Look into down payment assistance programs available at the local or state level.

While using a 401(k) for a down payment is possible, it’s usually not the best financial move due to the risks to your retirement savings. If you do decide to use your 401(k), a loan is often preferable to a hardship withdrawal. Before making a decision, consult with a mortgage professional or financial advisor to explore all your options and ensure you’re making the best choice for both your homeownership and retirement goals.

What Percentage of Your Income Should Go Toward a Mortgage?

When buying a home, one of the most critical financial decisions is determining how much of your income should go toward your mortgage. Striking the right balance ensures that you can comfortably afford your home without stretching your budget too thin. Lenders use various guidelines to help buyers determine affordability, but personal financial goals and lifestyle should also factor into the decision.

General Mortgage Affordability Guidelines
A common rule of thumb is the 28/36 rule, which lenders often use when evaluating mortgage applications:

  • 28% Rule: Your monthly mortgage payment (including principal, interest, property taxes, and homeowners’ insurance) should not exceed 28% of your gross monthly income.
  • 36% Rule: Your total debt payments (mortgage, credit cards, student loans, auto loans, etc.) should not exceed 36% of your gross monthly income.

For example, if you earn $6,000 per month before taxes, your recommended mortgage payment would be around $1,680 (28%), and your total monthly debt obligations should be no more than $2,160 (36%).

Factors That Influence How Much You Should Spend
While the 28/36 rule provides a helpful guideline, several factors may influence how much of your income should go toward your mortgage:

1. Your Debt-to-Income (DTI) Ratio
Lenders use your debt-to-income (DTI) ratio to assess affordability. Some loan programs allow for higher DTIs:

  • Conventional loans typically require a DTI under 43%.
  • FHA loans may allow DTIs up to 50% in some cases.
  • VA loans consider DTI but also look at residual income, offering more flexibility.

A lower DTI makes you a more attractive borrower and may help you qualify for better interest rates.

2. Your Down Payment
A larger down payment reduces the loan amount, which can lower your monthly mortgage payment and improve affordability. If you put down 20% or more, you also avoid private mortgage insurance (PMI), further reducing costs.

3. Your Lifestyle and Financial Goals
Your mortgage payment should allow you to maintain a comfortable lifestyle while saving for retirement, emergencies, and other financial goals. If you prioritize travel, investing, or other expenses, you may want to keep your mortgage below the recommended 28% threshold.

4. Location and Cost of Living
Housing costs vary significantly by location. In high-cost areas, buyers may need to allocate a larger percentage of their income to housing, while in lower-cost regions, a smaller percentage may suffice.

Finding the Right Mortgage Payment for You
To determine an affordable mortgage payment:

  1. Calculate Your Monthly Income – Use gross (pre-tax) income as a starting point.
  2. Factor in Existing Debts – Consider car loans, student loans, credit cards, and other obligations.
  3. Estimate Homeownership Costs – Beyond mortgage payments, account for property taxes, insurance, HOA fees, and maintenance.
  4. Use a Mortgage Calculator – Online tools can help you estimate affordability based on income, interest rates, and loan terms.

While the 28/36 rule provides a solid framework, your ideal mortgage payment should align with your personal financial situation and long-term goals. Before committing to a home loan, assess your budget, factor in all homeownership costs, and ensure you have room for savings and discretionary spending. Consulting with a mortgage professional can help you determine the right loan amount and structure to fit your needs.