Q: What’s the best way to pay for my mortgage closing costs?
A: There's no one best way to cover the legitimate fees you'll encounter when getting a mortgage, and they can be substantial. Generally, there are three ways to approach the issue. Each of these three options has different effects on your mortgage cost over time:
- Pay them out-of-pocket today. Paying them today brings the lowest interest rate but the highest initial expense.
- Add them to the loan amount (provided you have a sufficient down payment). Adding them to the loan amount brings higher total costs over time.
- Trade them off for a slightly higher interest rate. Trading them for a higher rate also means higher total costs over the long term.
It should be noted that most borrowers don't have all three choices available, but usually at least two can be found in the market. How much a choice will cost or save you also depends upon how long you hold onto the loan.
Since there's a lot of math to be done to see those cost effects over time, HSH.com has developed a great calculator which shows homebuyers how to pay closing costs.
(For refinancing homeowners wrestling with how to best finance your refinance, HSH.com’s Tri-Refi Refinance Calculator is the proper tool.)
What works best in your situation will depend upon your cash position, whether those funds would be better used to make a larger down payment (possibly avoiding mortgage insurance), or held for reserves in case of emergency.
Even if you can pay the costs out-of-pocket today, it may be better over your time horizon to finance them--doing so may cost you less over your time frame.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.