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When consumers apply for a mortgage loan, they must decide whether to lock in a rate at application, to let the rate float between application and closing, or to choose some type of "float-down" program. What should home buyers do about interest rates when they apply for a mortgage loan? One of the questions we frequently get asked by borrowers is whether they should lock or float their interest rate. For purchases, it usually pays to get a rate locked in as soon as you apply. Most people are going to close on their purchase within 30 to 45 days, and, for the most part, rates do not move (with some notable exceptions) a whole lot during a time period that short. If a floating rate is going to keep you up at night between application and closing, you should consider locking in. Keep in mind, for most people, what we are talking about is a savings of $10 to $20 per month if interest rates change by 1/8% or 1/4%. On the other hand, for people applying for a large loan, the payoff could be sufficient to elect to float. As a consumer, weigh whether you would be absolutely devastated if the rate went up slightly versus the potential savings to be gained. Today, many lenders offer at least a 60 day rate lock from application at no additional cost, and longer rate locks of perhaps 90 to 120 days at an additional cost of a 1/4 to 1/2 point. In fact, if you are looking at new construction, some lenders will offer six to nine month rate protection. Of course, what most people want is the best of both worlds: the ability to lock in a rate today and take advantage of any drop in the market before their closing. Can a consumer lock and float? In fact, a number of lenders today do offer a "float-down" option, which gives consumers the ability to take advantage of im-provements in rates prior to closing. Costs and restrictions on this program vary widely, so be sure to get all the facts so that you fully understand how a particular program works. With the many options available now, there should be a program to fit every borrower's needs. If a buyer signs an agreement to close on a home in more than 60 days, should he or she either wait to apply or take a longer lock for a higher cost? We would never suggest that anyone to wait to apply. Purchasers usually have a mortgage commitment date that they need to meet quickly. Sellers will want to know that their buyers are qualified by that date, which may be much sooner than the closing date. In terms of a 60 day or 90 day lock, usually the cost for a 90 day lock is relatively small. The small price paid for a lock-in will more than offset the cost of a higher interest rate or possibly not qualifying for the loan. For example, the typical charge is an additional 1/4 point for a 90 day rate lock. On a $100,000 loan, this equals $250. If interest rates were to increase by 1/4%, the monthly cost on a 30 year fixed rate loan would increase by $16 per month. Over the life of the loan, this small monthly increase reaches almost $4,000 in higher payments. What advice do you have for people seeking to refinance? Many consumers literally wait for years for low interest rates because they only want to refinance if they can get the lowest rate. Unfortunately, they miss out on savings while they wait. For example, if borrowers can save $200 per month by decreasing their rate from 9% to 7.5%, they should focus on the savings they can get, not on the small amount they might be missing because rates are not at 7.25%. Our advice is that if a refinance makes sense with current rates, the borrower should consider one right away. Many lenders charge a lock-in fee. Is this an extra charge? Most lenders do not charge an additional fee for locking in for 60 days, but they may collect funds up front to insure that the loan will close. These funds should be credited to the borrower at closing. After all, if the lender is going to take the risk of holding an interest rate for a consumer for 90 or 120 days, it would be unfair for the consumer to go to another lender before closing. Also, the lender will lose money on longer-term rate locks that do not close so they must offset their loesses. If you are required to pay a lock-in fee when you lock in your rate, make sure that you understand what part of it is applicable to your closing costs. Why are there rate lock fees, and what do lenders do with them? Lenders often require a fee from consumers to hedge the interest rate risk they face. The longer you want to lock an interest rate, the more risk that lender takes. Just as a consumer buying a bank CD gets a better yield for the longer they are willing to part with their money, (e.g., a five year term yields 5% and a six month term yields 4%), there is an expense to the lender to hold interest rate products for an extended period of time. The longer investors have to wait for the loan to be closed, the higher the rate they will want to receive. For mortgages, this is expressed as higher points for a certain rate. When can borrowers lock in an interest rate for their mortgage? Rate lock policies vary greatly by lender. At some lenders, for example, the consumer can lock, float or select a float-down option at the day of application. Consumers should be aware that if they floats the interest rate, they will only be able to get rates as of the day they do decide to lock in. If a borrower learns that rates increase on Monday, for example, Friday's lower rates are gone for good. Only if rates decreased again would the borrower be able to take advantage of the lower rates. Similarly, if you lock in today and rates decrease tomorrow, you must keep that rate unless you have selected a float-down option. Although often stable, interest rates can literally change hour by hour in an active market. Unfortunately, interest rates tend to move down slowly but increase quickly. As a result, it is important to stay informed about interest rates if you are floating your rate. While lenders should keep applicants informed of current rates, it is the borrower's responsibility to make a decision to lock in. How do you actually lock in an interest rate? Many borrowers believe that
they have locked into an interest rate when they sign their application
with a rate at the top of the application. Many states have laws
governing what constitutes an official locked interest rate for
mortgages. Generally, lenders will have a written pricing agreement
separate from the application form that both the lender and the
borrower must sign to guarantee that the rate is actually locked.
While many lenders will allow you to lock an interest rate over
the telephone, you should always ask for and expect to receive
written confirmation from the lender. The Mortgage Almanac Consumer Checklist for Mortgage Rate Lock-Ins 1. Get all rate locks in writing (separate from your loan application). Make sure the rate lock shows the loan program, the interest rate and the total points if any on the loan. For adjustable rate loans, make sure all index, margin and cap information is included. 2. Make sure the lock-in is from the actual lender if you are using a mortgage broker. 3. Make sure the lender has the financial wherewithal to back up the lock-in in case of a major interest rate movement. 4. Anything that is too good to be true is! If one lender seems much lower than all others, approach with caution and get it in writing. 5. If lock-in fees are required, get written confirmation of how those fees will be refunded or credited at closing. Michael Licamele is the Editor of MortgageAlmanac.com and President of Residential Finance Network at rfnc.com. |
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