Maximizing Your Buying Power

Interest rates on mortgages are continuing to hold at historically low levels. These low levels combined with the tremendous variety of lenders and loan products available to the consumer, provide an opportunity that has never existed before. The smart borrower can put together financing packages that his parents never would have even dreamed of.

This article touches on a few ways consumers can use current low rates and new loan programs to save money. Since a home mortgage is usually the single largest outstanding item of debt on a personal balance sheet, managing this debt wisely can reap substantial benefits to almost every homeowner. Some useful techniques include the following:

• No Closing Cost Loans
• Hybrid Loans - Shorter Fixed Periods
• Using ARM Teaser Rates in Your Debt Strategy
• Eliminating Mortgage Insurance

No Closing Cost Loans

Any loan where the broker or lender pays all of your closing costs is commonly referred to as a ``no closing cost'' loan. These closing costs would include title & escrow fees, appraisal, lender's fees, credit report fees, and other expenses which are non-recurring over the life of the loan. Lender's use the term non-recurring to refer to only those expenses which are one time, and to exclude items such as interest, insurance, and property taxes, which are considered recurring closing costs because they will continue to be expenses every month. Recurring costs are not covered expenses in a no closing cost loan.

In the mortgage market, there are a variety of interest rate and point combinations available to the borrower at any point in time for the same product or loan type. As an example, for a loan amount of $200,000 a borrower can be quoted 6.75% with .875% points, 7.0% with zero points, or 7.25% with no closing costs. All three of these quotes are for a 30 year fixed rate mortgage. The lender allows the borrower to choose amongst rate and point combinations since some people prefer a lower rate immediately, while others prefer minimizing how much they pay out of pocket upfront. Thus, the borrower can select the combination which feels most comfortable to their personal situation. For some borrowers, the no closing cost option of 7.25%, while providing a slightly higher rate, still requires the least investment upfront and therefore is the best option.

No closing cost loans can be used for either a refinance or a purchase transaction, although they are most commonly associated with a refinance. A no cost refinance is the quickest way to generate immediate interest rate and payment savings with no upfront investment in closing costs. To continue with our example, let's assume that a borrower is currently at 7.5% on a 30 year fixed rate loan and is interested in refinancing now that interest rates are declining. But what is the best time to finally ``bite the bullet'' and lock in a rate? If the person chooses to refinance using the no closing cost method, it doesn't matter when they lock in, so long as they are immediately saving money by refinancing. By choosing the 7.25% no closing cost loan, their payment would decrease right away, with no upfront investment to refinance. Should interest rates continue to decline, the borrower can simply refinance again to obtain additional savings.

In a purchase situation a no closing cost option can work extremely well when the borrower has limited funds available for closing or when the rate market is declining and the borrower may want to refinance quickly. While most people associate a purchase with paying points just to obtain tax deductibility of the points, this is too simplistic a view. While the tax deductibility is an important factor, it is only one consideration for a borrower. Paying points upfront to secure a low rate, in a steadily decl