Function

• The purpose of adding closing costs to a mortgage loan is to eliminate the amount of money that borrowers have to spend out-of-pocket. Many lenders allow you to roll the closing costs into the principal balance of the loan. This is a service used so that you can afford a loan that you may not be able to otherwise. Not spending thousands of dollars in closing costs can significantly help your personal cash flow.
  
  

Balance

• Before you engage in this activity, you should consider what will happen to the balance of the loan. When you add the closing costs to the loan, this increases the amount of money that you are borrowing, which gives you a higher loan balance and puts you further in debt. The lender will determine if the value of your house is sufficient to cover the new loan amount with the closing costs added in, according to MichaelBluejay.com.
  
  

Loan Payment

• By rolling the closing costs into your loan balance, you also will increase the mortgage payment. While this process will save you some money on the front end, you will have to pay more every month for the duration of the loan. This action has long-term consequences that you should consider. For example, if you have a 30-year loan, you will be paying for those closing costs over three decades.
  
  

Interest

• Another factor to consider is the extra interest that you will be paying on the closing costs. If you pay them in cash, you are charged only what they cost. When you roll the closing costs into the loan, they increase the principal balance, which is being charge interest. This will increase the total amount of money that you have to pay for the closing costs over the long term.
  
  

Points

• You may be offered an opportunity to pay points on your mortgage. Points are a type of closing cost that buys down your interest rate. One point is equal to one percent of the mortgage balance. Consider paying points because this will reduce the interest rate on your loan and help offset the extra money that you will have to pay in interest charges on the balance. Depending on how much you are borrowing and whether you have the money to pay for the points, they may work to your advantage and they may be tax deductible, advises the Quicken Loans website.