Strategies to Lower Your Mortgage Interest Rate

by Dian Hymer

Interest  rates on jumbo mortgages jumped about 3/4 percent in mid-August. Before  settling for higher rates or giving up altogether, consider the following ways  you might lower your financing costs.

Even though  jumbos increased in price, conforming rates -- for mortgage amounts up to  $417,000 -- decreased. On Aug. 20, for example, it was possible to find a  30-year fixed-rate conforming mortgage for 6.25 percent and one point. At the  same time, jumbo mortgages over $417,000 were going for 7.25 percent and one  point.

"Points"  is a term lenders use for a mortgage origination fee that's paid by the  borrower one time only at closing. One point equals 1 percent of the loan  amount. By paying more points upfront, a borrower can lower the mortgage  interest rate for the term of the loan.

Points are  tax-deductible on purchase mortgages in the year of purchase for those  borrowers who itemize deductions. Restrictions apply, so be sure to check with  your tax advisor to see if paying points will lower your overall cost of  financing. Usually, the longer you plan to keep paying on the mortgage, the  more worthwhile it is to pay points for a lower rate.

HOUSE  HUNTING TIP: Buyers who don't have the extra cash to pay points could ask the  seller to pay points for them. Most lenders permit a seller to credit cash to  buyers at closing for their nonrecurring closing costs. Points are a  nonrecurring closing cost -- they are paid once at closing, unlike mortgage  payments or homeowners insurance that is paid for on an ongoing basis.

Lenders  have limits on how much a seller can credit a buyer. It's usually 3 to 6  percent of the purchase price. Before you write an offer, find out your  lender's limit. Then ask the seller to credit you a dollar amount that falls  within the lender's guidelines. This way you won't raise a red flag with the  lender that could cause your loan to be denied.

Also be  aware that appraisers are taking a hard look at seller credits to determine if  they affect the market value of the property. If you inflate your offer price  to cover the cost of points and this puts the price out of line with current  market value, the lender could lower the appraised value. In this case, your  mortgage amount might also be lowered, leaving you short on the funds you will  need to close.

No one  knows the future direction of interest rates. But, if you believe that interest  rates will come down soon and that you'll refinance into a lower-interest-rate  mortgage, you might be better off paying a higher rate now and no points.

Another way  to reduce your mortgage interest rate on jumbo financing is to create a blended  rate by combining a low-interest-rate conforming loan with a second mortgage.  Secondary financing is available in amounts up to $500,000 for buyers with a 20  percent cash down payment, a good credit score (over 700 with some lenders) and  verifiable income.
By  combining a conforming $400,000 fixed-rate first mortgage at 6.25 percent with  a fixed-rate $400,000 second mortgage at 7.4 percent, you end up with a blended  rate of 6.8 percent. So, you create jumbo financing for under 7 percent in an  over-7 percent first-mortgage market.

Most  conventional second mortgages have payments that are amortized over 30 years,  with a due date in 15 years. This means that there is a balloon payment when  the loan is due, unless you pay the principal down substantially during the  term of the loan.

THE  CLOSING: Make sure that there is no prepayment penalty on the second mortgage  so that you can make pay-downs or pay the loan off at any time without penalty.

Copyright  2007 Dian Hymer. Distributed by Inman News.