Rolling your closing costs into your mortgage loan: Should you do it?
Many mortgage lenders offer what they call "no-closing cost" loans – mortgages you can roll your closing costs into rather than paying them upfront. As an investor, these loans can be tempting. After all, they reduce the amount of money you'll need upfront to buy a property. They also free up cash flow, ensuring you have plenty of funds to finance any repair, rehab, or marketing costs on the tail end. But make no mistake: These mortgages aren't perfect. In fact, they could actually cost you more in the long run.
Are you considering a no-closing cost loan for your next investment purchase? Here's what you'll want to think about.
Is it a short-term or a long-term investment?
With no-closing cost loans, upfront fees are really just rolled into the loan balance (essentially, you're financing those costs). That means a higher monthly payment and more interest paid long term. For these reasons, these types of loans heavily favor short-term homeowners – ones who expect to pay off the loan before those added interest costs really get out of hand.
If you're planning to hold the property (and the mortgage) longer, it's probably not in your best interest to roll in those closing costs.
How much are the closing costs?
You also need to factor in how much those closing costs are and what your monthly payment will be with them rolled in. If you're not careful, they could put you above your lender's loan-to-value or debt-to-income thresholds, which might mean paying for private mortgage insurance or, in some cases, getting stuck with a higher interest rate. Both of these equal extra costs – and a slimmer profit margin to boot.
What's your cash flow situation?
How much cash you have – not to mention how much you need – should also play a role in your decision. Do you have the funds to cover the closing costs upfront? Would doing so deplete your emergency savings or leave you lacking in funds needed for repairs? If so, rolling those costs in might be your only option.
On the other hand, if you have plenty saved up or some equity you can pull on from another property, paying closing costs upfront is likely your best bet. It might mean a bigger chunk of change now, but it will reduce your monthly payment and interest costs, ultimately freeing up more cash flow in the future.
Instead of rolling your closing costs into your mortgage, you could also ask for lender credits or seller concessions. Both can give you a little break on your closing costs and make getting your foot in the door a bit more affordable.
Here are more tips for lowering the closing costs on your next investment property.
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