Sharp borrowers who think beyond just their interest rate often find themselves looking for answers to other important mortgage questions. One very important (and often overlooked) element of the mortgage shopping process is the question of how to handle their loan’s closing costs.

The answer to the “loan costs” question actually varies with each borrower’s unique situation. For the purposes of today’s column, I am using the term “costs” generically. Please be mindful that borrowers’ total closing expenses will normally include their down payment and prepaid taxes and interest, in addition to their loan’s costs and fees.

There are essentially three ways for borrowers to cover mortgage costs: pay cash out of pocket, use their home’s equity, or have somebody else pay for the costs. That “somebody” could be a seller, if you find one willing. It could also be your lender, who will usually put you into a loan product that will produce a sufficient “yield” to cover your costs.

Do not be deceived. If a lender claims that he will “cover your costs”, he will certainly recoup that money in some other way. Nobody works for free, and a “no cost” loan simply means that you are paying for your own expenses in another way.

If you have it, using your home’s equity is usually a good option, especially if you intend to stay in the loan for a very long time. This tack should give you an optimum interest rate which will save you huge money over time.

Accepting a slightly higher interest rate and asking your lender to cover your costs is a good idea for short-term mortgages. You will have slightly higher monthly payments, but you will pocket the chunk the money you would have otherwise forked out on those costs.

Timothy Phillips is a mortgage banker and newspaper columnist.  Homebuyers should always consult a professional for guidance specific to their situation.

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