Consider Long Term Interest When Borrowing Closing Costs

Refinancing your rental properties can be a good idea when trying to lower monthly housing expenses or paring down on long term interest charges by switching to a shorter loan term. There are several considerations to make when deciding whether or not refinancing makes financial sense and isdon't roll costs into your loan something you should discuss with your loan officer and financial planner.

It’s more than just asking if rates are lower. But once you decide to take the plunge and apply for a new loan at some point you’ll need to decide how to handle your closing costs.

There are closing costs on a refinance just as there are for a purchase loan. Lender fees, appraisal, title charges, they’ll all magically reappear. It’s a brand new loan, after all. What are your options for a refinance? Some borrowers like to pay for closing costs out of pocket. This keeps the loan balance from increasing and adding to long term interest charges. Still others like to keep the cash in their pockets and roll the closing cost into the loan amount. But is that the right call?

Say you have a rental property with a $200,000 loan. You determine that refinancing makes sense yet now you need to decide what to do with the $4,000 in closing fees. Say you’re refinancing into a 30 year fixed rate loan at 4.50%. The monthly payment on a $200,000 mortgage is $1,013. You can  write a check at the closing table for $4,000 or finance the charges over 30 years by including them into your loan amount. $4,000 at 4.50% on a 30 year note hits you with a $3,296 interest charge over the term of the note. But there’s a third option: take a higher rate and obtain a lender credit. Your loan officer can adjust your interest rate to accommodate all or part of your fees. It’s not an either or situation and borrowing $4,000 results in more than $3,000 in interest .