With thousands of people buying homes or refinancing their existing home loan each day, many are left wondering if they should include the closing costs from a real estate transaction in their home loan. On the one hand, this means that you would pay less out of pocket today, but on the other hand, you would pay more for these costs over the lifetime of the loan.

The Top Line

• The costs of closing on a mortgage or home loan refinance can be significant and require a lot of upfront cash.
• Some people who don't have the cash on hand to be able to pay the closing costs may seek to include the closing costs in the loan.
• There are times when it is a good idea to include the closing costs and there are other times that it is not--this all depends on the situation.
• We will help you analyze the advantages and disadvantages of including closing costs in your home loan to help you decide whether it is worth it in your specific situation.

Advantages of Including Closing Costs in a Home Loan

There are a lot of advantages to including the closing costs of your home loan or refinance in the loan. However, it's not right for every situation. One of the strongest advantages to going this direction when it comes to your closing costs is that it means you won't have to come up with as much cash right away at the start of your loan.

This can be a huge help for those who are tight on cash and don't have a lot of liquid cash to allocate for the closing costs. Even if you have the cash, you might find peace of mind in financing the closing costs instead of paying them upfront. This tactic is mostly used for refinancing and not so much for new home purchases.

Disadvantages of Including Closing Costs in a Home Loan

Though the practice of including closing costs in the home loan is common, it's also not right for everyone. One such example is if you are planning to purchase a new home. When you do the math, you'll discover that even if your bank does allow you to finance your closing costs and include them in the cost of the loan, you will pay thousands of dollars of extra interest over the course of the loan, not to mention the increased monthly payment that will restrict the cash flow of the loan holder.

For new homeowners, including closing costs in the loan is generally a bad idea because of the vast amount of extra that you'll end up paying on the loan. It may save you money in the short-term, but will undeniably cost more over the life of the loan.

In Which Situations Should You Include Closing Costs in a Home Loan?

The best situation that this strategy is used within is if you are refinancing your home. Even though you are not purchasing a new home, the bank will still charge closing costs for the mortgage. If you are saving enough money by refinancing, it may be worth it to also finance the closing costs. The bank will provide you with guidance on this topic when the time comes.