Learn more. Already a member? Sign in here. Access to timely real estate stock ideas and Top Ten recommendations. Learn More. Real estate has long been the go-to investment for those looking to build long-term wealth for generations.
Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide. 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.
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. 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.
Other costs cannot be rolled into the loan. These include items like prepaid property taxes and homeowners insurance. Typically, around 6 months of property taxes and insurance need to be paid into an escrow account upfront. When you roll closing costs into your mortgage, you have less out—of—pocket funds and more cash on hand. In addition, by adding the closing costs to your new mortgage balance you are increasing the loan—to—value.
By increasing the LTV, you are reducing the amount of equity in your home. Less equity means less profit when you go to sell your home.
You would also have less equity if you wanted to take out any type of home equity loan. Closing costs must be paid by the buyer or the seller as a seller concession. But with a refinance, many lenders will allow you to roll the closing costs into the loan provided you still meet lending criteria DTI and LTV after doing so. Closing costs can be an expensive part of buying a home. In addition to saving for your down payment, you need to save for closing costs, too. There are a variety of ways you can reduce how much money you have to bring in for closing.
Some options involve rolling closing costs into your loan, but there are some other good choices, too. Not all purchase loans allow you to roll your closing costs into the loan. If you are able to do so, there are some financial consequences you need to be aware of. Some loans will allow you to increase your interest rate while giving you a credit that offsets some or all of your closing costs.
If you hear about zero-down loans, they often work this way. The lender covers your closing costs in exchange for a higher interest rate. Another option is to try to negotiate a seller concession, where the seller pays for some of your closing costs, reducing your out-of-pocket expense. FHA and VA loans are backed by the federal government, and they have different loan parameters and fees than conventional loans do.
FHA loans require a borrower to pay an upfront mortgage insurance premium, which is usually 1. But you must have a 3. Depending on your situation, many other closing costs associated with an FHA loan may be able to be rolled into the loan. VA loans require a borrower to pay a VA funding fee, and that can be financed.
This fee goes directly to the Department of Veterans Affairs to fund the program and pay for any losses due to their loan guarantee. Some borrowers are exempt from the funding fee entirely. Other closing costs usually have to be paid at closing, but it depends on the exact scenario for your loan. Closing costs for refinances and home equity loans are generally much lower than they are for new mortgages. This is especially true with a refinance that gives you a lower monthly payment.
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