Should I finance my closing costs?

Question

Hey everyone,

I'm on the verge of buying my first home. It will be a starter home obviously, and I plan on being in it for about 3-5 years.

I have enough cash to afford the 20% down payment and closing costs, but that would not leave much leftover for random expenses.

Would it be a good idea to finance my closing costs into the mortgage? What would be some pros/cons of doing so?

Thanks!

Answer 1

Like the guy on TV said: WHAT part of NO is unclear?

You will be paying interest on the closing costs for the life of the loan.

Answer 2

What you want to do is calculate the difference between your monthly mortgage payment with and without the 20 percent down. That will take into consideration the difference in interest rate, if any, and the difference in points, if any, and the difference caused by PMI, if any.

Then calculate how many months it will take to get the 20 percent down payment back if you put the difference into a savings account each month.

For example, say the house is 100k. If you finance the 100k, and your interest is 6.5pct, your payments are $632. If you also pay PMI of $100 per month, total payment is $732 (without escrows). If you put in 20k, and didn't pay the PMI, and paid only 6% instead of 6.5%, your payments would be $480. If you saved the difference of $250 each month, you'd have that 20k back in about 6.6 years, even ignoring interest on the savings.

Figure that with your numbers, and you'll probably have your answer.

Answer 3

I would not suggest you do that. I would suggest that you ask the seller to either pay the closing costs or to pay half and pay them at closing. Once you start playing around with your loan figures you might end up with a balloon payment you don't want down the road. Also it will add precious time to the transaction because the Underwriter will have new conditions for you.