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Pros and Cons of Financing Your Closing Costs

When you’re buying a home, one of the things you have to factor into your budget are closing costs. Typically, homebuyers spend between 2% and 5% of the purchase price on these expenses. If you agree to finance your closing costs, you’ll pay less money up front. Before making that move, however, it’s best to weigh the advantages and disadvantages of taking that route. If you want additional expert guidance, use SmartAsset’s financial advisor matching tool to pair up with a financial professional who can help you with your real estate needs.  

Check out our closing costs calculator.

When It Makes Sense to Finance Closing Costs

Financing your closing costs doesn’t mean that you avoid paying them entirely. It simply means that you don’t have to bring thousands of dollars to the closing table. If you’ve already spent a large portion of your savings on your down payment, financing your closing costs over the term of your mortgage might be a good idea.

It might also be worth considering if you’re refinancing your home or you’re applying for a home equity loan. You might not end up paying too much extra interest, especially if you pay off your loans relatively quickly.

Why You’re Better Off Paying Closing Costs in Cash

Pros and Cons of Financing Your Closing Costs

Bringing a cashier’s check to the closing table might be painful. But it might benefit you in the long run. If you add closing costs to your home loan, your lender might raise your interest rate. If you’re taking out a 30-year mortgage loan, for instance, that could significantly increase the amount you pay.

Bottom line: Paying off your closing costs over time rather than up front might not save you that much money. So you might be better off paying for them in cash during the closing stage.

Try out our down payment calculator.

How to Pay Less Up Front

If you’re trying to get around paying closing costs up front, there are a couple of things you can do. For one, you can ask your seller to pay for part of your closing costs. The percentage of your closing costs that your seller can cover depends on the type of loan that you’re applying for.

If the seller is reluctant to cover the closing costs, you could try raising the purchase price to seal the deal. But that means you’ll end up paying more over the life of the loan.

Related Article: What Is a Seller Concession?

The Takeaway

Pros and Cons of Financing Your Closing Costs

Including closing costs in your home loan may be the best way to finalize the purchase of a home, especially if you’re short on cash. But it’s best to explore all of your options before pulling the trigger. For example, there are programs that provide down payment and closing cost assistance to qualifying buyers.

You can also ask your lender if they’ll accept funds that you receive from a relative. If your lender is okay with that, its’s important to make sure you document the gift in detail to avoid any problems at closing. The more avenues you’re willing to explore, the more money you may be able to save.u

If you’re not sure which option is right for you, consider talking to a financial advisor about the available avenues. SmartAsset’s financial advisor matching tool makes it easier to find a financial professional who can help you with your real estate needs. First you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to up to three advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/Julia_Sudnitskaya, ©iStock.com/MagMos, ©iStock.com/Pamela Moore

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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