You have seen all the advertisements promising no points, no closing costs.

These ads are somewhat misleading because one way or another, you are going to pay closing costs.

The difference is, when a lender is offering a no closing cost loan are wrapping them into your mortgage loan.

This may be done through wrapping the costs themselves into the principal balance of the loan or by increasing your mortgage rate.

How much are typical closing costs?

Closing costs can add up very quickly.

According to the Federal Reserve, these costs may vary widely from as little as $5,800 to as much as $19,930 largely depending on the lender, how much equity you have in the home and your local property tax rate.

Keep in mind, while these figures are based on buying a home, there are some costs that remain stable even if you are refinancing.

Some typical expenses when closing a refinance loan include appraisal fees, credit reporting fees, title and escrow fees and points to the lender and/or broker.

So how do you determine whether or not to pay these fees out of pocket or roll them into your loan?

There are a couple of questions to ask before you agree to roll closing costs into your mortgage.

How long to I plan to keep the loan?

In general, the longer you plan to keep the loan, the worse idea it is to roll closing costs into your mortgage.

While this may seem counter-intuitive, think about this: If you roll the costs of your closing costs into your mortgage loan, you will pay interest on that amount over the life of the loan.

If closing costs are $2,500 and the interest rate is 6.25 percent, over the life of the loan, you will pay approximately $3,000 in interest charges on the original amount.

What is the difference in interest rate?

Typically, a lender will increase your interest rate by approximately .25 percent (one quarter of a point) to accommodate mortgage closing costs.

Over the life of a loan, this will result in slightly more than $6,000 in interest payments based on a $100,000/30 year loan. Additionally, the monthly payment will be nearly $20 higher per month which over 30 years adds up to just over $7,000.

When considering a home mortgage refinance, it is important to discuss closing costs with your lender.

Depending on a number of factors including interest rates, the length of the loan and whether or not you are planning a cash-out refinance, your best decision may be to pay the costs out of pocket.

Over the life of the loan, paying closing costs out of pocket could save thousands of dollars.