diff --git a/lib/ansible/runner.py b/lib/ansible/runner.py
index 730d8d7e419..3ebe089f503 100644
--- a/lib/ansible/runner.py
+++ b/lib/ansible/runner.py
@@ -554,10 +554,9 @@ class Runner(object):
         copy_module = self._transfer_module(conn, tmp, 'copy')
 
         # template the source data locally
-        source_data = codecs.open(utils.path_dwim(self.basedir, source), encoding="utf8").read()
-        resultant = ''            
         try:
-            resultant = utils.template(source_data, inject, self.setup_cache, no_engine=False)
+            resultant = utils.template_from_file(utils.path_dwim(self.basedir, source),
+                                                 inject, self.setup_cache, no_engine=False)
         except Exception, e:
             return (host, False, dict(failed=True, msg=str(e)), '')
         xfered = self._transfer_str(conn, tmp, 'source', resultant)
diff --git a/lib/ansible/utils.py b/lib/ansible/utils.py
index 29b164de910..c6a7346fce1 100644
--- a/lib/ansible/utils.py
+++ b/lib/ansible/utils.py
@@ -257,8 +257,8 @@ def varReplace(raw, vars):
 def template(text, vars, setup_cache, no_engine=True):
     ''' run a text buffer through the templating engine '''
     vars = vars.copy()
-    text = varReplace(unicode(text), vars)
     vars['hostvars'] = setup_cache
+    text = varReplace(unicode(text), vars)
     if no_engine:
         # used when processing include: directives so that Jinja is evaluated
         # in a later context when more variables are available
@@ -273,7 +273,7 @@ def template(text, vars, setup_cache, no_engine=True):
 def double_template(text, vars, setup_cache):
     return template(template(text, vars, setup_cache), vars, setup_cache)
 
-def template_from_file(path, vars, setup_cache, no_engine=False):
+def template_from_file(path, vars, setup_cache, no_engine=True):
     ''' run a file through the templating engine '''
     data = codecs.open(path, encoding="utf8").read()
     return template(data, vars, setup_cache, no_engine=no_engine)