Can You Pay Closing Costs With A Credit Card?
With borrowing becoming easier and regulations around mortgages changing, many people wonder if there is an alternative way to make this large payment on the day the sale closes – but is it really possible to pay for the closing costs with a credit card? We took a closer look at the facts.
Note: since most people reading this article are likely curious about the answer in the context of a mortgage, we use the terms ‘loan’ and ‘mortgage’ interchangeably, even though a mortgage is really just one type of loan. The concepts below apply similarly to most types of loans, though.
What Are Closing Costs?
Closing costs are the fees associated with closing on a home, and typically include things like:
- Title insurance
- Appraisal fees
- Attorney’s fees
- Up to the first year of homeowner’s insurance
- Escrow fee
- In some localities – upfront payments of the first 6-12 months of property taxes
- And more …
Costs can typically range from 2-5% of the purchase price of the home for buyers (check out this calculator to put in your specific numbers) and can be higher for sellers, often 5-10% of the sales price. So this is an outlay that can quickly add up.
With median home prices hovering around ~$450K, that means the average buyer should plan for ~$9-22K in closing costs!
Closing costs are calculated by the lender and are due at the time of closing. You will typically be given an estimate of these costs within three days of applying for your mortgage loan. Usually, you will then be given a final closing disclosure before you close the loan, and this will provide you with the full, final figure.
Can You Pay Closing Costs With A Credit Card?
So, can you pay closing costs using a credit card? The answer, unfortunately, is that ‘it depends.’ As a rule, many homeowners will use a credit card to cover some of the costs of closing a sale, but there can be limitations and restrictions depending on your lender, such as the maximum amount that can be covered with a credit card.
Nevertheless, many borrowers will want to use their credit card either to access the liquidity it provides and spread out the payment (despite high-interest charges), or they may just want their credit card rewards despite the fact they’ll payoff the card balance right away.
Ultimately, it is up to you to decide if paying closing costs with a credit card is the right option for you, and it is important to consider all the factors involved and weigh up the pros and cons before making a decision.
If you do decide to put a large amount of closing costs on your credit card, ensure you carefully calculate the monthly payments, including interest charges you will need to make, and double check that you can afford to do this.
It can be helpful to speak to your lender or financial advisor about your options, as they may be able to provide additional advice on how best to manage your finances and ensure that you are making the right decision for your situation.
What Options Do I Have For Paying Closing Costs?
If you don’t want to use a credit card to pay your closing costs, there are other options available, and these include:
1. Pay Closing Costs Upfront
The most convenient way to pay closing costs is to pay them upfront. This means that you will need to have the funds available at the time of closing to cover these costs. This will prevent your loan costs from increasing any further and will allow your loan rate to remain intact. This is an option that can be used with all types of loans.
2. Roll Closing Costs Into Your Loan
Another option is to roll your closing costs into your loan. This means that you will be able to pay for the closing costs over time, as part of your monthly loan/mortgage payments, rather than have to come up with a lump sum at the close of your purchase.
This can be a great option if you don’t have the funds available upfront, but it does mean that you will end up paying more in interest over the life of the loan and that you will need to make higher loan payments. In addition, this option increases the loan-to-value ratio and could impact your eligibility to qualify for the loan in the first place.
Rolling closing costs into your loan is not an option on every type of loan from every bank. It typically is an option if you have an FHA (Federal Housing Association) loan – a loan insured by the government and offered by banks or other financial institutions – but not if you have a VA (Veterans Administration) loan, for example.
Check with each banker you’re getting a quote from to see if this is an option they’re willing to offer.
3. Negotiate to have the lender and/or seller cover some or all closing costs
- From the Lender: often referred to as ‘lender credits,’ make sure you ask about each lender’s willingness to give these when you’re getting multiple quotes. Pay careful attention to caveats and/or changes in terms. A common practice is for lenders to offer these closing cost credits – in exchange for a higher interest rate. In the context of a mortgage particularly, you may hear this referred to as a ‘no closing cost mortgage.’ Once you’re down to considering a few lenders, you may be able to ask for a second time what they’re willing to do in terms of lender credits, and maybe they will offer a bit more to win your business, by letting them know that they’re one of the last couple of lenders you’re considering and you’re making a decision soon. There’s no guarantee they will give you any credits though, depending on current market conditions, how much they want this specific deal, and how much they want you as a borrower. So negotiate carefully and with understanding of these considerations.
- From the Seller: depending on the current market dynamics, and the specifics of your deal, you may or may not be able to get the seller to chip in for your closing costs. If it’s a strong sellers’ market, where sellers are likely entertaining multiple good offers, it may not even be worth asking since it might make you less competitive. However, if it’s a buyer’s market, you will likely want to at least try asking. After all, the seller wants to get the deal done too, and closing costs are a part of doing the deal. Always consider asking/negotiating for these concessions within the greater context of your specific deal and current market conditions.
4. Use another type of financing
Consider using a personal loan or SBLOC to cover closing costs. You will likely want to be upfront with your lender about your intention to do this, so they can factor it into their critical debt-to-income ratio calculation. If they find out at the last minute that you’re taking out another loan, and the amount of the loan substantially alters that calculation, it could cause a major problem.
Note: in the case of a mortgage, you likely will not be able to use a personal loan to pay the down payment, most lenders do not allow it.
Whether or not you can put the costs on a credit card also varies widely by lender and by the service providers you need to pay the closing costs too.
There are other options available for paying closing costs, such as paying them upfront, rolling them into your loan, negotiating the lender and/or seller to pay some or all closing costs, or using another type of financing. Each option has its own pros and cons, so it is important to weigh up all the options before making a decision.
Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School.
After seeing the lack of personal finance education for regular people, Cody started the website with the mission to provide everyone access to information that will help them achieve their financial goals.
Cody approaches personal finance from a maximalist perspective, shunning typical advice around simply not buying a cup of coffee instead of more effective methods like investing in yourself to quickly grow your income.
He believes in saving money and investing for the future, but he also knows that you need to enjoy life today. That’s why Cody approaches money with a sense of humor and a positive attitude. He knows that if you’re not having fun while you’re growing your wealth, then what’s the point?
Cody approaches life with the same gusto that he brings to personal finance. He loves to travel and experience new cultures, and he is an avid reader and learner. He also enjoys playing sports (especially tennis) and spending time with his family and friends.