Should I Finance My Closing Costs?

When you are faced with the (sometimes daunting) prospect of buying a new home, you are probably going to be strapped for cash and watching carefully every penny that goes into the purchase. Regardless, unless you are a professional home buyer, most people are invariably surprised at the extra costs and fees that must go into buying a new home. Some of these costs are simply rolled together in one lump fee called “closing costs.”

Most lenders will allow you to ‘roll’ the closing costs into the price of the home rather than paying them out of pocket, which may seem like a great way to save thousands of dollars up front and out of your pocket now, but is it always a good idea to do this?

Putting Down Roots

If you are buying this home with the intention of putting down roots and staying put for a long while, then rolling the closing costs into the mortgage in order to save cash up front may be a decent thing to do. Understand, of course, that it is going to increase the mortgage that you will end up paying by a substantial amount. Even if your closing costs are only $3,000, over the course of a 30 year loan at 5 percent interest, your decision to roll the closing costs into the mortgage calculate out to be nearly $6,000 paid to the mortgage company, or $16.10/month. If that is not daunting to you at all when faced with the prospect of coughing up that money right now, then go for it.

Flipping Quick

If this is an investment home or a home you are just buying to sell quickly with no intention of keeping very long, then rolling the closing costs into the price of the mortgage is probably a losing proposition - literally. It can take years of mortgage payments to make your money back, and since you do not intend to own this property for those years, you will almost certainly lose your money.

A final note about fraud…

It is an unfortunate practice that some sellers offer - in conjunction with the buyer - to increase the selling price of the home by a few thousand dollars and then “offer to pay the closing costs”, which effectively rolls the closing costs into the sale of the home without the buyer paying up front. This is an honest mistake, but it can be construed as fraud in many states because it amounts to deliberately misrepresenting the value of the home to the bank.