Profile picture for maycfred

Closing costs rolled into Refi or paid up front?

When speaking to my mortgage rep about refinancing my FHA loan to an FHA streamline refinance, he offered either 4% if I roll the closing costs into the new loan or 3.75% if I pay closing costs up front.  He strongly recommended not paying that up front but I don't really understand why.  Investing it may not yield 4% return and I have the cash.  We don't plan on staying in the home for more than 5 years and most likely less.  If I take the 3.75%, the refi is definitely worth it to us, so I assume the other option would also be worth it, but I cannot understand which option is really better for us to take.
  • January 30 2012 - Franklin Park
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Answers (12)

To me rolling the costs into the loan is not very smart. Why pay interest for x amount of years on a fee?? Its like when people take out a 20-30k line of credit on their home to buy a car... They could have bought a 100k car after its all said and done.. But this is america where its not how much we make that matters but how much we can borrow....
  • January 31 2012
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At 3.875%, provided the market remains the same tomorrow, could take care of the closing costs, the UFMIP, and the cost to set up your escrows.  Yes you would be refunded from your old escrow account after you close so that in a way is cash in hand.
  • January 30 2012
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mcherno, the reason I asked if you are using an appraisal is because 1 of the 2 options your lender gave you is to roll the closing costs into the loan amount. Since you are upside down and can not use an appraisal, then you can not roll anything into the loan amount except the interest in the payoff and the UFMIP. There are 3 parts to your refinance, closing fees, prepaids which are funds for a new escrow and a few days of prepaid interest, and the charge for the upfront mortgage insurance which is 1% or $2700. Since you only plan to stay another 5 years, you definitely need a no cost loan. I believe if you contact Joe Cafiero who posted a couple of times you will find that he can do this with a credit to cover the closing fees AND the $2700 upfront MI fee at a 30 Yr rate of 3.875%. That only leaves you with bringing the prepaids to closing at the end of Feb which you would have paid out March 1 anyway had you not refinanced. In addition, whatever is in your existing escrow after the Feb 1 payment gets refunded about 30 days after closing. There will be no recapturing of closing fees so you start saving every month from the first payment.  The 5/1 Arm is another option but Arms do not pay as much premium to pay for closing costs so you may find the rate on a 5/1 Arm to be the same as the Fixed rate if trying to cover all the closing costs and UFMIP in the rate. If your plans change and you end up staying for 10 more years then it also pays to have the Fixed rate.You should contact Joe C just to get solid advice and estimate to compare to.       
  • January 30 2012
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The easiest way to compare is to do a side by side analysis.  I could prepare this for you if you'd like.  But you would just find out the breakeven time frame for paying the extra cost to get the lower rate, divided by the dollars saved per month for the lower rate.

Did you consider a 5 year arm for your fha streamline?  Fixed for 5 years then adjustable!  You stated you will not be in the house for 5 years.  This will bring you closer to 3.25% approximately with little cost.

Good luck!
  • January 30 2012
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Assuming closing cost (not including pre paids which I suggest you not refinance in the new loan) are $3,000 or more, I would opt for the 4% no closing cost added to your loan. It will take approx.6.4 yrs. to payback $3,000 so 3.75% is not as good of a deal for someone planning on being in property 5 yrs or less as you mention. 
  • January 30 2012
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Appraisal will do you no good.  You can have all your closing costs paid for at 3.75%.  Nothing besides the UFMIP needs (or for that matter can be) rolled into the loan amount.  Happy to help out.  Contact me through my profile.

  • January 30 2012
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Profile picture for maycfred
To answer 1 poster's question:  The current value is $250,000, we owe $270,000.  And the lender is not asking us to have an appraisal. 
  • January 30 2012
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What size loan are you talking about?  Also you are aware that your monthly mortgage insurance is most likely going to jump if you bought the home before April of 2011.  Depending on the size of the loan you should be abel to get all your closing costs paid for with the exception of the UFMIP at 3.75%
  • January 30 2012
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The choices are sort of strange to me, you may have a third choice. Are you having an appraisal done ( If so, what is the estimated value? )  and what is the current loan balance?
  • January 30 2012
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Profile picture for GMerino
Rolling the closing costs is worth it as you are not planning in staying in your home for 5 years.

Geofrey Merino
  • January 30 2012
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Profile picture for shapiroamg
The 3.75% will most likely mean you need to bring more $$ to closing. Do you have $$ to bring? If not the 4% might make better sense.
Double check that at 3.75% the closing costs are or are not being rolled into the loan or can be.
  • January 30 2012
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This depends on how much you are refinancing, but as a real estate agent, I would say, if you have the money, pay for it up front, and get the better interest.  I see so many people roll their closing costs in, and then wonder when they go to sell it, why they can't get what they owe.  I'd do the math, and figure it out, but chances are, you'd save money paying it now and getting the lower interest rate.  Your lender is paid to lend money...of course he'd tell you to finance it all. 
  • January 30 2012
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