If you are refinancing a home mortgage loan you can roll closing costs as well as other debts into the new mortgage, as long as it meets certain conditions. The primary factor in whether this will be possible is if you have equity in the property. If you are getting a mortgage on a new home you are purchasing, you can sometimes roll closing costs into the loan but not additional debts.
Significance of Loan-to-Value Ratio
One of the main factors in determining mortgage approval and terms is the loan-to-value Ratio (LTV). The most significant LTV is 80 percent because any mortgage higher than that will require private mortgage insurance, adding to the monthly loan cost. So if you are refinancing a loan that is already at an 80 percent LTV, you will not be able to roll in closing costs, or if you do, it will drastically alter the loan. Every 5 percent LTV increment can affect the pricing on the loan. The lower the LTV, typically the lower the interest rate you can get.
Rate and Term Refinances
A rate and term refinance pays off the balance of the existing loan with a new loan for the same amount, plus the closing costs. This type of refinance is almost always simply for the purpose of lowering the interest rate. Because of the allowance to roll in the costs, this is a great option for people who don’t have the cash in hand available for typical loan charges. When you refinance, you typically have one month when you do not need to make a mortgage payment based on when one loan is paid off and the start of the new loan. Also, the escrow balance on the old loan will usually be refunded after closing (sometimes it is deducted from the payoff). Thus, a borrower can end up with more cash in hand after doing a rate and term refinance.
If you are rolling debts other than your mortgage loan into the new mortgage, then you are doing a cash-out refinance. This is the second category of refinance loans. Depending on the lender’s requirements, other debts, such as credit cards or car loans, will be paid off in escrow, or you will be given the cash after closing to pay them off yourself. This is a great option for those who have significant equity in their home but are also saddled by debt. Cash-out refinances sometimes have an add-on to the interest rate or loan fee and usually are not allowed at higher than an 80 percent LTV.
The ability to leverage equity toward better cash flow and elimination of debt is one of the advantages to being a homeowner. But every time you refinance and roll in closing costs and/or additional debt you are spending the equity you have in your home. This will lessen your flexibility in the future and reduce the amount of cash you will get if you ever go to sell your home.
Adding closing costs and other debts to a refinance makes perfect sense if greater cash flow is your goal. But if your goal is to eventually pay off your mortgage, then this strategy runs counter to your larger plans.
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