We receive this question very frequently. Does it make sense to finance closing costs into the loan amount or is it more beneficial to bring the closing costs into the close of escrow?

First things first-no matter how the closing costs are paid, amount remains the same, unchanged.

Take a $300,000 loan amount for example let’s assume closing costs are $2500 and you’re getting a 30 year fixed rate mortgage at 3.75%. Let’s also assume this refinance is saving you $250 per month.

Take the closing costs of $2500 and divide that into $250 per month, doing so shows us a recapture on these monies of approximately 10 months. In other words, takes 10 months, to recoup closing costs paid in conjunction with the loan. If you take the loan amount and increase it to $305,000 that will change your payment assuming the same interest rate by $11.58 per month.

For $11.58 per month, it might be a better option to keep your $2500 liquid in the bank and finance the fees and since it’s a payment change of $11 per month. $11 per month versus the $250 per month your already incurring by virtue of the refinance the cost versus reward, is yours to make, but that’s the math.

How to calculate whether rolling the fees of the refinance into the loan is justifiable

Simple math you can have your loan officer do, take the amount of closing costs over the term of whatever loan you’re getting, for example of 30 year fixed rate mortgage/360 months and amortize that principal balance amount by whatever interest rate you’re getting in conjunction with financing the mortgage. This is how we did the math in the above referenced example. Amortize $2500 by 3.75% over 360 months. That shows how much your payment will change and gives you the accurate figures to determine whether or not paying those monies over the life of the loan is the most favorable approach.

*Quick refinancing tip: when you complete a refinance you do start over a new term e.g. 360 months if you’re taking out a 30 year fixed rate mortgage. While you do start all over again on the new amortization schedule, by making the same payment you’re making now with a higher payment on the new loan you’ll attain by virtue of the refinance enables you to forgo starting over the loan again. You’re essentially starting over right where you left off so long as you continue to make the higher payment which automatically applies to your principal mortgage balance each month.

If you are trying to determine what your closing costs will be on a refinance or whether or not paying them over the life of the loan is the most beneficial or not, contact Scott.Sheldon@nafinc.com to discuss your situation and get a complementary rate quote.