Buying a house is a landmark event in anybody’s life, not only because it provides your first real taste of independence, free from parent’s guardians, and landlords, but because it takes a lot of money and hard work to achieve
And that’s before you even factor in closing costs.
Closing costs are additional fees that can be charged to both the buyer and seller of real estate in order to complete the transaction. The price of closing costs differs depending on property value, but they tend to amount to 2–5% of the total cost of the property.
That means they stand to leave you pretty light of pocket, which can make rolling them into your mortgage or refinance an enticing prospect, but is such a move financially shrewd, or a recipe for disaster?
As is the case with most things in life, there is no one clear-cut answer to this question. It all depends on your circumstances.
However, if it can be helped, it’s best not to roll your closing costs into your refinance. Here are some pro-tips to help you decide on the best course of action.
What Does It Mean To Roll Closing Costs Into Refinance?
Simply put, rolling your closing costs into your refinance agreement means you’ll be adding them to the overall borrowed sum rather than paying them upfront.
As is the case with any interest-based financial agreement, such an act can be a total lifesaver in the moment, but can really sting over time.
Being that the closing costs are added to the loan itself, it becomes subject to interest just like the rest of the borrowed sum, which means, over time, you’re looking at paying out a pretty penny.
For example, let’s say that you took out a 30-year $200,000 loan or mortgage at a rate of 3.25%. You’d be looking at paying $870 a month.
But if you’ve thrown the additional, say, $6000 closing fees on top of the 200K loan, you’ll be paying something to the tune of $897 a month.
Granted, an extra $27 a month doesn’t seem like a lot, but remember, this is over a 30-year period. You’ll end up paying $9700 on closing costs overall — $3700 more!
And that’s assuming interest rates don’t rise, which is unrealistic over such a long repayment term.
Can All Closing Costs Be Rolled Into Refinance?
You might also like to know that you won’t be able to avoid all closing costs when rolling them into refinancing. Prepaid property taxes and homeowners insurance need to be paid upfront.
These funds will be held in escrow, accessible to the lender when the time comes to pay the bills. The fees you usually will be able to roll over include…
– Origination fees
– Credit report fees
– Appraisal fees
– Discount points
– Title insurance/fees
Reasons To Roll Closing Costs Into Refinance
Even though it’s best to pay your closing costs up-front and have it over with, there are certain situations when rolling them into new finance might be considered strategic.
1. You don’t have the funds.
If you physically don’t have the funds to pay the closing costs, then your decision has been made for you. You’ll have to use this extra loan service to get by.
2. You don’t want to eat into your savings.
The expense of buying a house doesn’t end with the closing fees. Now you’ve got your own space, you want to make it feel like your own space by renovating and decorating, right?
Well, unfortunately, that’s going to cost more money, and refinancing that closing excess, can help you pay for it.
This is especially a good idea if you’ve managed to snag a loan with great rates, as the interest won’t be quite as severe.
3. The roll-over would offer you better rates than paying with alternative credit.
If you don’t have the money to pay the fees upfront, and you were considering using a short term mode of credit to pay it off, it’s almost definitely going to be worth your while to roll over instead, as the interest rate and repayment term will be more reasonable.
4. It won’t have a big impact on your DTI and LTV ratios.
DTI stands for debt-to-income and LTV stands for loan-to-value. If you’re very much in the green on both these counts, adding the small additional fees on top of a loan won’t have such dire implications.
Reasons Not To Roll Closing Costs Into Refinance
As we’ve already established, it’s best to get closing fees paid up as soon as possible, but let’s discuss why.
The number one reason to avoid rolling those troublesome closing fees over to a new financial agreement is that the excess will incur interest, meaning you’ll be paying a lot more in the long run.
2. It can negatively affect your chances of securing loans in the future
When considering your credit application, lenders will evaluate your DTI and LTV. If the extra money you’ve thrown on top of your initial refinancing in order to cover closing costs has bumped these ratios up, lenders are less likely to invest in you.
Do You Have Any Other Options?
While there isn’t much else you can do to handle closing fees, there are a couple of things to mention that you may wish to pursue.
Borrow From A Friend Or Family Member.
If you’ve got a well-to-do friend or family member that doesn’t mind spotting you the closing fees, you can avoid both paying unnecessary interest and dipping into your savings.
Ask the lender to cover the closing fees.
You can also request that the lender covers your closing fees for you, but of course, it won’t come for free. The price for the privilege is a slightly higher interest rate.
That’s about the long and short of it, folks. Refinancing your closing costs can help you out of a bind, but if you can avoid carrying them over to a new financial agreement, you’ll be better off in the long run, as you won’t have to pay additional interest charges.