Financing closing costs may be unwise

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Many mortgage borrowers are tempted to finance their closing costs, that is, adding the costs to the loan amount. This could be attractive to borrowers who can earn high returns on their free cash, or those who don't have any free cash. Financing closing costs is very costly, however, if the larger loan increases the price of the mortgage. This will happen if the loan amount crosses a "pricing notch point" (PNP) -- a point at which the interest rate, points or mortgage insurance premium increases. Since any price increase will apply to the entire loan, not just the increment used to finance closing costs, it will make the increment extremely costly. For example, suppose financing $8,000 in closing costs on a $400,000 loan takes the loan past a PNP where the mortgage insurance premium jumps by 0.25 percent. The additional premium amounts to $1,020 in year one alone, of which $20 is on the $8,000 loan increase and $1,000 is on the original $400,000. On conventional...