Monday Morning Economist: Buying with the House's Money

With Fixed Rate Mortgage products sitting at all-time record lows based on data tracked since the 1950s "No Closing Cost" refinances are all the rage and for good reason. A homeowner refinancing an FHA 30yr Fixed Mortgage of $350,000 with a rate of 5% down to 3.75% stands to save over $242 monthly. Factor in the fact that the original loan amount was probably higher and the savings are greater. So how does the no closing cost refinance work since surely there are some lender fees, title insurance, settlement expenses and State/County taxes? The answer is simple; the borrower elects to take the slightly higher than market interest rate of 3.75% and in return receive a credit from the lender to cover most if not all closing costs. With rates so low the borrower can refinance to a smaller payment and often not pay any closing costs nor increase their principal balance.

If one can use the bank's money to refinance in this manner then why not submit a more competitive contract offer doing the same exact thing? Many home seekers in insulated markets such as the DC Metro Area started their search with the firm disposition that this was a "Buyers Market" only to find out that they ran up against multiple offers and in some cases escalation clauses. A seller surely will give much weight to the highest offer and listing agents are verifying the validity of the pre-approval letters accompanying incoming contracts. But all things being equal an offer not requesting closing cost assistance is going to be viewed as stronger than that of a competing bid that does.

For homebuyers taking advantage of rock bottom rates who are purchasing their first home or perhaps buying up where down payment and/or closing costs are tight there is a window of opportunity to still get an incredible interest rate and some assistance from their lender. If one of your clients falls into this category consider advising them to consult with their loan officer and devise a more competitive offer by leveraging a credit from their lender. The impact on the monthly payment of ¼% to their rate is minimal compared to the cash out-of-pocket they will save and may just help their next contract offer stand out.

Thad Musser is a Vice President at First Savings Mortgage and has over 12 years of mortgage banking experience with an undergraduate degree in Economics and a masters in Finance. tmusser@firstsavings.com ~ www.thadmusser.com.