Mortgage Closing Costs: What’s the Best Option for You?
Is It Better to Pay Closing Costs Upfront or Include It in Your Mortgage?
When you secure a mortgage loan, you'll encounter closing costs—fees charged by your lender and other third-party companies involved in the loan process. These costs can be quite high, often amounting to thousands of dollars. You'll typically have two options for handling these costs: pay them upfront as a lump sum or roll them into your mortgage and repay them over time with your regular mortgage payments. Which option is best? It depends on your financial situation and long-term goals.
How Much Are Closing Costs?
Closing costs usually range from 2% to 6% of your total loan amount. For instance, if your mortgage is $345,000, you could be looking at closing costs between $6,900 and $20,700. That’s on top of your down payment, making it a significant financial hurdle for many homebuyers.
If you're feeling the pinch, don't worry—you do have options. You can either pay these costs upfront or choose to roll them into your mortgage.
Paying Closing Costs Upfront
One common approach is to pay your closing costs upfront. This can be a smart move if you’ve recently sold a home and have extra cash from the sale. By paying these costs upfront, you avoid paying interest on them, which can save you money over the life of your loan.
Rolling Closing Costs Into Your Mortgage
If you're short on cash, another option is to roll your closing costs into your mortgage. For example, if your loan amount is $345,000 and you have $7,000 in closing costs, you could add that amount to your mortgage, bringing your total loan to $352,000. You'll then repay this amount over time through your monthly mortgage payments, with interest.
This approach makes sense if you don’t have enough extra cash to cover the closing costs upfront. For instance, if you haven’t sold another home and don’t have proceeds to rely on, rolling the costs into your mortgage might be a more feasible option.
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The Downside of Rolling Closing Costs Into Your Mortgage
While rolling your closing costs into your mortgage can make homebuying more affordable initially, it does come with a downside. You’ll pay interest on these costs throughout the life of your loan, which means you’ll end up paying more in the long run. If you can afford to cover these costs upfront, it’s usually the better choice.
Additionally, there may be limits on how much you can borrow. For example, if you’re approved for a maximum loan amount of $340,000, but your mortgage amount is already $338,000, adding $7,000 in closing costs might not be possible.
What’s the Best Option for You?
The right choice depends on your financial situation. If you can afford to pay your closing costs upfront, it might save you money in the long term. However, if cash flow is tight, rolling the costs into your mortgage can provide some breathing room, even if it means paying more over time.
To make the best decision, it’s wise to discuss your options with your mortgage lender. They can provide personalized advice based on your financial situation and help you choose the option that works best for you.
Need assistance with budgeting for closing costs? As a local realtor, I can guide you through the financial aspects of buying a home. Let’s talk!
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