Financed Closing Costs
Definition and meaning of Financed Closing Costs in real estate.
Financed closing costs are transaction fees that are added to the total mortgage balance rather than paid in cash at the closing table.
In more detail
This strategy allows home buyers to purchase a property with less money out of pocket, which is helpful for cash-strapped buyers. The tradeoff is that the borrower will pay interest on these fees over the life of the loan, which increases the monthly mortgage payment.
Lenders must approve this arrangement, and the property must appraise high enough to support the larger loan amount.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Primary benefit | Reduces the upfront cash needed to buy a home |
| Primary drawback | Increases the monthly payment and total interest paid |
| Subject to | Loan-to-value limits and appraisal requirements |
A buyer adds their transaction fees to a mortgage loan, increasing their loan balance from the purchase price to a higher amount to avoid paying cash at closing.
Frequently asked questions
Can you finance closing costs on any mortgage?
Not always, because conventional, FHA, and VA loans have strict guidelines regarding loan-to-value ratios that limit how much you can borrow.
Is this the same as lender credits?
No, lender credits involve the lender paying the fees in exchange for a higher interest rate, whereas financing the fees adds the actual dollar cost to the loan balance.