A common misconception that a Buyer may have is that the Seller is gifting you the amount of your closing costs for you when you request them to pay closing costs in a real estate transaction.
In reality, you are FINANCING your closing costs instead of paying them yourself.
There is nothing wrong with this approach and it is EXTREMELY HELPFUL for many buyers, especially 1st time home buyers. It is a huge accomplishment to save up enough for a down payment on a house so financing your closing costs is a great way to speed up the process and get into the house of your dreams just a little bit faster.
I asked my friend Chris Spenser from WinTrust Mortgage to give me a quick and basic example of how much you would pay for you closing costs over the life of your loan. Please keep in mind that you could use that money to invest as well and come out better (or worse) in the long run had you invested the amount of the closing costs. I am just trying to portray a simplistic example.
It would be the difference paid in interest over the life of loan by financing the costs. (because it increases the total loan amount)
Another way to explain this would be the increase in payment for your scenario: By financing the closing costs the total monthly payment is $31.07 higher each month x 360 months = $11,185 more in payments. However you come to closing with $6,750 less by financing the costs. So $11,185 – $6,750= $4,435 more in total costs as a result of financing them over a 30 year period.
This assumes they stay in the property for the full 30 year term.
As rates increase that margin will also increase.
I just want to make sure Buyers understand this prior to making a decision about Seller Paid closing costs.