For a purchase loan, closing costs may not be rolled into a loan. Most home owners refinancing do roll in closing costs; but then again, most do not consider doing it any other way. Let’s look at the pros and cons for your options.
Advantages of Rolling Closing Costs into Your Refinance
1) There is no money out-of-pocket except for the appraisal. (A minority of lenders also require the credit report be paid out-of-pocket. Still fewer want a non-refundable application fee, and I do not recommend working with those lenders.)
2) It requires one less step, because you don’t need to get a cashier’s check.
Disadvantages of Rolling Closing Costs into Your Refinance
1) You take out a larger loan, because your closing costs are added. (In a 30-year term loan, it does not make much difference in your monthly payment. Depending on loan size and the lender’s costs, it could be as little as $10 to $30/month.)
2) You pay interest on the closing costs, because they are now part of the loan.
3) It may be easier for the lender to overcharge you, because borrowers who are bringing in no money out of pocket do not pay as much attention to points, high fees, and junk fees. It all seems so “painless” with the costs all rolled in.
I have seen people sign shockingly expensive loans with a big smile on their faces all because the loan officer told them, “Don’t worry about it; it’s all rolled into the loan.”
Conclusion
Which option is best depends on your personal cash flow situation. If you can easily pay for your closing costs, then why not take the smaller loan with the smaller payment?
On the other hand, if paying for the closing costs would present a financial hardship, then by all means, go ahead and roll them into the loan.
Before you proceed, make sure your refinance is a good one. Pick up a copy of the best-selling book that exposes all the dirty secrets that make consumers pay too much. It’s a quick, easy read and you can skip around to the chapters that interest you most.
Mortgage Rip-Offs and Money Savers
I recommend the paperback copy, because the Good Faith Estimates from real banks and brokers that expose the junk fees, etc. come out too small to read on the Kindle.