Mortgage Confidential: Lower your closing costs

Mortgage expert David Reed invites Walletpop readers to ask him questions about real estate financing. leave your questions in the comment section of this post.

Let's do a flip on a previous post where we talked about how to lower your mortgage rate by 1/4% by paying one discount point. Lenders can lower your mortgage rate for you if you decide you want to pay them for the privilege. On a $250,000 note, two points would lower your rate by about 1/2% but it would cost you $5,000 to do so. What if you didn't have $5,000 for points? Well, then you'd get the mortgage rate offered at zero points. But what if you were also short on closing costs and didn't have the money for things such as an appraisal, title insurance or attorney fees? Again, look to your rate.

Just as lenders may reduce your rate by 1/4% by paying a point, they can also increase your rate by that same 1/4% and give you a point that you can use at closing to help offset closing costs. Does that make sense? Of course it does.

Using that same example with a 30 year fixed rate of 6.00% on a $250,000 mortgage, the monthly payment is $1,499 per month. Now increase that rate by 1/4% to 6 1/4% and the new monthly payment is $1,539 per month, or a difference of $40. Yeah, it's higher, but you also saved $2,500 in closing costs because your lender gave you one point at closing in exchange for a higher rate!

If you're short on cash or otherwise don't want to completely empty your piggy bank in order to buy a house, look at the option of exchanging a slightly higher rate for a cash rebate. The number just might work!

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.

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