Should you factor your closing costs into your mortgage?


Buying a home is an expensive prospect. You have to make a down payment, pay the movers, and buy furniture for your new home. But there’s another expense that many buyers forget to consider: mortgage closing costs.

Closing costs are not universal. Each mortgage lender sets their own fees which are then passed on to borrowers when they finalize their home loans. Typically, closing costs range from 2% to 5% of a borrower’s loan amount. Nationally, they average $ 5,749. Your loan estimate should include your closing costs so you know what fees to expect. In fact, your lender should itemize each charge for you on your closing statement so that you know everything you are paying.

The good news is that as a borrower, you usually don’t need to write a check for your closing costs when signing your mortgage. You could go this route, but you often have the option of shifting these charges into your mortgage and paying them off with the rest of your loan. This applies to new home purchases and refinances. The question is: which is the best choice?

Should you pay closing costs up front?

The advantage of writing a check for your closing costs when you finalize your mortgage is that you don’t have to take on more debt when you buy a home. If you factor your closing costs into your loan, you pay interest on them. Pay them up front, and you don’t, which lowers your monthly payment.

On the flip side, if money is tight and you’re already spending a large chunk of your savings on a down payment, you might be better off putting the closing costs on your loan. Plus, if you’ve been successful in securing a low interest rate on your mortgage, it might not hurt to just invest a few thousand extra dollars in your home loan.

How to reduce your closing costs

The less you have to spend on closing costs, the smaller the check you owe or the less you add to your mortgage balance. This is why it is wise to keep your closing costs to a minimum. You can do this in several ways:

  • Take a look at the offers. You may find that one lender offers lower closing costs than another.
  • Negotiate with the lender of your choice. Your lender may be willing to reduce certain fees (for example, application fees or origination fees) in order to earn your business.
  • Check if your seller will pay some or all of your fees. In a normal real estate market, it’s not uncommon for buyers to ask sellers to recoup some or all of their closing costs. Sellers are often willing to do this if they want to guarantee the offer they have received. But this strategy may not work at the moment because it is a sellers market.

Keep in mind that while a good credit score may help you get a low interest rate on your mortgage, it doesn’t necessarily mean you qualify for lower closing costs on that home loan.

What is the right call for you?

No matter how much you end up spending on closing costs, think about how best to pay those costs. If you can afford the extra cash at the close, you may decide to just fork it out and be done. But if you’d rather keep more money in your savings, you might want to build closing costs into your mortgage instead. This is especially true if you are buying a home that requires a lot of work. You may need this money in the short term to get it back in shape.

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