Finance Settlement Costs in Mortgage Refinance?

March 15, 1998, Revised January 4, 2003 "I expect to stay in my house a long time and don't want to pay the high rate required on a no-cost mortgage, yet I'm strapped for cash. Can I pay the settlement costs but borrow a larger amount to cover them? Would this reduce the benefit from refinancing?" Lenders ordinarily will allow you to fold the settlement costs into the loan amount on a refinancing without classifying it as "cash-out". For example, if the balance on your old loan is $100,000 and settlement costs including the lender's fees are $3,750, the new loan could be for $103,750.  A loan larger than that would be a cash-out with a higher price. Calculator 3a, which shows the net gain from refinancing, has a financing option. Those who use it will find that it reduces the gains from refinancing, extending the break-even period. This is largely because the borrower must pay interest on the costs at the mortgage rate. Financing the costs, furthermore, can flip the loan amount above 80% of property value, which triggers mortgage insurance. The calculator automatically factors mortgage insurance into the cost calculation, if it arises. Copyright Jack Guttentag 2003

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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