The Mortgage Brothers Show

When Refinancing Is It Better To Roll In Closing Costs Or Pay Them At Closing?

In this post, we’re going to dig into a question we get a lot: Is it better for me to pay my closing costs upfront or roll them all into the loan?

The number you’re thinking about probably isn’t just closing costs alone

Often what you think of as “Closing Costs” are actually the closing costs plus prepaid taxes and insurance, plus an interest rate. When you get a quote from a lender, they’re likely incorporating the prepaid taxes and insurance in the quote for closing costs.

How to approach closing costs.

Consider the interest. Let’s just say, in general, average closing costs are $2,500. We’re basing these numbers on a $300,000 loan. In this scenario, your prepaid taxes and insurance for the new escrow account are $2000. So, you have a total of about $4,500, when you add closing costs to  your prepaid taxes and insurance.

Next you need to decide: Do you roll that $4,500 into the loan, or do you come to the closing table with it? That’s the actual question.

In this case, if we were to pay interest on that $4,500 for the average life of the loan, at say a 4% interest rate, it would range from between $500 and $700 of interest that you would pay over the next five years.

Is it worth paying your closing costs to save that money on interest?

While, in this case, your mortgage is tax deductible, and the interest is tax deductible, you need to ask yourself is: Do you have a better use for your money?

You might have $80,000 in your savings account and it might be very easy for you to come to the closing table with $4,500. But do you have a car loan? Do you have credit cards? Do you have any investments that you want to put that money towards? Is there anything you can do with $4,500 that will earn yourself more than the market? That’s the question you need to ask yourself.

What is the financially best way to approach my mortgage as it relates to my financial position?

When considering whether to roll your closing costs in or not, consider that question. There is no one objective best way to handle this. It really depends on your situation.

When should you be rolling in your costs?

If you are not debt-free and you have debt such as a car loan, credit card, debt, or student loans, then you’re probably not in the best position to be rolling in your closing costs. You should be taking that money and paying down your car, your credit card, or your student loans. That’s the best use of that money.

Who should be rolling in their closing costs?

Someone who is totally debt-free and has their emergency fund fully funded and their retirement account going. Basically, if they have excess money. Our answer to that person is: If you don’t have to don’t. If you can afford it, why would you stop there. How much money do you have in your bank account? If you’ve got $100,000 sitting there making 0.5% interest don’t roll in your closing costs, bring that money to closing and an extra $20,000 to drop that mortgage down. You’d probably save close to $50,000 or $60,000 over the lifetime of the loan.

What is my financial position in life?

This is the big question to ask yourself when deciding what to do about closing costs. But either way, if you roll your closing costs in, you can always decide not to later. You can still write that check six months down the line and it will go directly against your balance.

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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