Can I Pay Closing Costs with a Credit Card?
When buying a home, the question of whether you can pay closing costs with a credit card might come to mind. It’s essential to weigh the benefits and drawbacks of using a credit card for this purpose, as well as understanding the various factors that can influence this decision.
First and foremost, you should know that not all lenders accept credit card payments for closing costs. According to a 2018 survey conducted by the Federal Reserve, only 10% of homebuyers used credit cards to cover closing costs, with most relying on savings or assistance from family and friends. Additionally, some title companies and other third-party service providers may not accept credit card payments.
If you find a lender willing to accept credit card payments, it’s essential to consider the impact on your credit score. Typically, closing costs account for 2% to 5% of the home’s purchase price. If you’re purchasing a $250,000 home, the closing costs could range from $5,000 to $12,500.
Charging this amount to your credit card could significantly increase your credit utilization ratio, which accounts for 30% of your FICO credit score. A high credit utilization ratio may lead to a lower credit score, which can affect your ability to obtain credit in the future.
Another factor to consider is the processing fees associated with credit card payments. Credit card companies charge fees to the recipient of the payment, which can range from 2% to 3% of the transaction amount. In some cases, the lender or service provider may pass these fees onto the borrower, increasing your overall closing costs.
One potential advantage of using a credit card to pay closing costs is the opportunity to earn rewards, such as cash back or travel points. However, it’s essential to weigh the potential rewards against the potential negative impact on your credit score and the possibility of incurring additional fees.
It’s also worth considering alternative financing options for closing costs. In some cases, you may be able to negotiate with the seller to cover a portion of the closing costs, commonly known as a seller concession. Additionally, there are various down payment assistance programs and grants available to eligible homebuyers, which can help cover closing costs.
How To Finance Closing Costs
Financing closing costs is an essential aspect of purchasing a property, as these expenses can range from 2% to 5% of the home’s purchase price. According to a 2020 report by ClosingCorp, the average closing costs for a single-family home in the United States were $5,749, including taxes.
To finance these costs, homebuyers can consider options like negotiating with the seller, applying for down payment assistance programs, or rolling closing costs into the mortgage.
Rolling Closing Costs Into Your Mortgage
An attractive option for some homebuyers is rolling closing costs into their mortgage. This method allows you to finance the closing costs as part of your loan, effectively spreading the costs over the life of the mortgage.
While this approach can reduce your upfront expenses, it’s crucial to remember that it also increases your loan balance and monthly payments. Homebuyers should carefully weigh the long-term implications of rolling closing costs into their mortgage to ensure it’s the best financial decision for their situation.
Paying for a Home Inspection With a Credit Card
Home inspections are a vital part of the home buying process, with the average cost of a home inspection ranging between $300 and $500, according to HomeAdvisor. Paying for a home inspection with a credit card can be a convenient option, allowing you to earn rewards or cash back while ensuring the property is in good condition.
However, it’s essential to verify that the home inspection company accepts credit card payments and consider any potential fees associated with using a credit card.
Using a Credit Card for a Down Payment on a House
While the idea of using a credit card for a down payment on a house may seem appealing, it’s generally not recommended. Most lenders don’t allow borrowers to use credit cards for down payments due to the increased risk of default. Additionally, using a credit card for a down payment can negatively impact your credit score by increasing your credit utilization ratio.
Instead, homebuyers should consider saving for a down payment, exploring down payment assistance programs, or discussing alternative financing options with their lender.