Two options for covering your closing costs during a refinance

December 11th, 2014

If you’re a homeowner thinking about refinancing, you have two options for covering your closing costs if you’re not paying for them with cash. They are:

Taking a higher mortgage rate. In this scenario, often called a no-cost refinance, you avoid paying closing costs by accepting a higher interest rate. You will pay this higher rate for the life of the loan. For example, if the rate on a 30-year loan is 3.5 percent, you may end up paying as much as a half percent more, or 4 percent,  if you opt for a no-cost refinance.

Roll closing costs into your loan. In this scenario, you get the lowest rate you can, but include the closing costs as part of your loan balance.

If you have the money to pay cash for your closing costs, you’ll get the lowest rate possible and avoid adding to your principal balance. Which of the two other options make the most sense for you depends a lot on how long you will be in your home. The longer you plan to live in your home, the more likely you are to benefit from paying closing costs and getting the lowest possible rate.