Q: What’s the best way to pay for my mortgage closing costs?
A: There's no one best way to cover the legitimate fees you'll encounter when getting a mortgage, and they can be substantial. Generally, there are three ways to approach the issue. Each of these three options has different effects on your mortgage cost over time:
Pay them out-of-pocket today. Paying them today brings the lowest interest rate but requires highest initial outlay of funds.
Add them to the loan amount (provided you have a sufficiently-sized down payment). Adding them to the loan amount brings higher total costs over time.
Trade them off for a slightly higher interest rate. Trading them for a higher rate also means higher total costs over the long term.
It should be noted that most borrowers don't have all three choices available, but usually at least two can be found in the market. How much a choice will cost or save you also depends upon how long you hold onto the loan.
Since there's a lot of math to be done to see those cost effects over time, HSH.com has developed a mortgage calculator and a closing cost calculator which shows homebuyers how to pay closing costs.
(For refinancing homeowners wrestling with how to best finance your refinance, HSH.com’s Tri-Refi Refinance Calculator is the proper tool.)
What works best in your situation will depend upon your cash position, whether those funds would be better used to make a larger down payment (possibly avoiding mortgage insurance), or held for reserves in case of emergency.
Even if you can pay the costs out-of-pocket today, it may be better over your time horizon to finance them -- doing so may cost you less over your time frame.
