A home requires a certain amount of equity for a refinance or purchase. Mortgage lenders and third parties in your transaction charge fees known as closing costs, which reduce your equity if added to your new loan balance. Although you are responsible for paying closing costs, you can minimize the out-of-pocket expense of closing costs in certain transactions. When allowed, lenders have rules for rolling closing costs into a loan.
Adding Costs to a Refinance Is Common
A refinance pays off an existing home loan with proceeds from a new loan. In a refinance, you typically are allowed to add closing costs to the new mortgage. You need sufficient equity to pay off the previous mortgage balance, plus the closing-cost amount. Lenders usually don't charge a higher rate of interest or impose many limits to the closing costs you can roll into the refinance loan. However, lenders set loan-to-value limits, which cap the amount you can borrow relative to a home's value. If paying off your old mortgage causes you to exceed the maximum LTV limit, you can't add closing costs to your new mortgage.
Purchase Loans Don't Cover Closing Costs
You usually need a down payment when buying a home and lenders typically don't allow you to add closing costs to a new loan's balance. The down payment minimizes the lender's risk in a purchase transaction by ensuring you have a financial stake in the home. By requiring you to pay your own closing costs, a lender further ensures you're more invested in the property and thus less likely to default. Purchase loans usually have LTV limits between 97 percent and 75 percent, meaning the down payment required ranges between 3 percent and 25 percent, depending on the loan and property type. Only a few loans made by banks, or backed by the government such as Veterans Affairs and rural loans, allow zero down payment.
A Few Fees You Can Finance
The Federal Housing Administration, the Department of Agriculture and the VA allow you to finance a specific closing cost when buying a home. FHA loans impose an upfront mortgage insurance premium, the USDA requires a guarantee fee and VA loans have a funding fee. These one-time fees help to cover the lender in case you default. The government programs allow you to add these costs to your new loan balance without impacting the LTV limit.
Closing Cost Variations
The cost of getting a mortgage varies by location and lender. In 2014, Bankrate reported that Texas had the highest average closing costs in the country and Nevada had the lowest. Factors such as lender staffing and compliance with federal mortgage rules and regulations impact lender charges, while third-party fees such as title insurance and escrow services vary widely among providers. Bankrate also reported that mortgage fees were on the rise as of the time of publication.
- Military.com: VA Loan Closing Costs: An Added Benefit
- Mortgage Currentcy: Fannie/Freddie/FHA/VA/USDA Maximum Seller Contribution Chart
- Fannie Mae: Interested Party Contributions
- Bankrate: Closing Costs Survey: Mortgage Fees Rise
- Bankrate: Closing Costs: States Ranked
- Bankrate: Is No-Closing-Cost Mortgage For You?
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.