PFT #25 - Rolling In Closing Costs into a Home Purchase or Refinance
Updated: Mar 5, 2022
This week’s topic centers on closing costs for your home.
When you purchase a home or refinance, closing costs need to be factored into your planning.
There are many fees involved and the most costly are typically origination fees, title policy, and assumption fees.
Other closing costs (which may be optional to roll into your mortgage for the first year) include discount points as well as property taxes and homeowner’s insurance depending on where you live.
So what does it mean to roll in closing costs into your mortgage?
Here’s an example: Let’s say that you are purchasing a home for $310,000 and you put $10,000 down. This would be a $300,000 mortgage. That’s step one.
Step two, the closing costs which are typically between 2% - 6% of the loan amount. This means that you would pay between $6,000 - $18,000.
Wow! That is expensive and leads many homeowners to roll their closing costs into the mortgage.
So taking out the $10,000 down payment and adding in the $10,000 closing costs makes it wash. This means that you’re back to owing $310,000.
For that $10,000, with a 3% interest rate over 30 years, you’d pay $42 per month or $5,200 in total interest.
So let's reiterate that, you borrow 10,000 and pay $5,200 interest.
Although rolling your closing costs into your mortgage is convenient and saves you on upfront expenses, it stresses the need to budget and save money for this type of commitment.
So here is one last point to consider… If your only option is to roll in your closing costs, can you afford to pay for all other items that come with home ownership?