Each of us wants to think that we have gotten the best deal possible. This reality is more of a truism when one makes a commitment for what is considered the biggest purchase of his or her life . . . the purchase of a home. We negotiate the home's price with, at times, multiple offers and counter offers to obtain what we think the best price possible. Should we not also consider the long term implications of financing in our calculation of price? The price of a home is a fixed number.
The cost of a loan is a multiple of the amount financed. For example, a $150,000 loan at 7.5% for 30 years will cost $377,640 to repay, that's over $227,500 in interest. A quarter of 1 percent up or down in interest rate will save or cost over $9,000 during the 30-year term of the loan. Many factors determine the interest rate we pay. The rates can change daily and, from experience, I have seen rates change two or three times in one day.
How can we protect ourselves during the loan approval process regarding interest rate gyrations? If we know that our qualifying for the purchase of a home is dependant upon a particular rate, should we not make certain that a particular rate will be available to us when the loan is approved? Are there indicators that rates are going up? Conversely, are rates moving down and should we not hedge our bet that a lower rate may be available at the time we are approved and ready to sign our loan documents?
The above questions should be asked of the loan officer if you are in the process of buying or refinancing your home. On the $150,000 loan discussed above, every quarter of 1 percent movement on that loan will change the payment by approximately $25.00 per month. This may not seem like much, but for some it could be the difference between qualifying for the loan or not.
The rate lock may be the solution to the interest rate dilemma. A lender will allow the borrower to lock (have guaranteed) the rate and the points for an extended period during loan processing. Lenders will allow a lock for 30, 45, 60 and even up to 150 days. As the length of time covered by the rate lock increases, higher costs may be passed on to the borrower by increasing the points.
For example, if we quote a rate of 7.25% at one point for 25 days and the borrower would like to lock for 60 days the rate would remain the same (7.25%), but the points would increase by ¬ of one point to 1.25. The further out in time one locks, the higher the costs. As mentioned, we can lock up to 150 days. Many lenders will charge upfront fees for extended locks beyond 60 days, since they are now in an "at risk" position to deliver a loan to the investor market at a certain rate.
To protect yourself in a changing market or just to have certainty as to a monthly payment that fits your pocketbook, consider locking in your rate. Be certain the loan officer gets written confirmation of your rate lock. It should specify the subject property, the loan program to which you have agreed, the loan amount and term of the loan, the loan points, the lock term, i.e., 30,60,90 days, etc. and the type of loan transaction (purchase or refinance) it is.
The rate lock protects you, the borrower, if rates go up and it contractually binds the lender to maintain the "locked rate" for the time specified. If your loan is not approved or if the seller does not comply with your terms in a purchase transaction, you are not obligated to close the loan. Your rate lock, in effect, is an option. It gives you the right to close according to the terms agreed upon, but it does obligate you if you cannot by virtue of reasons beyond your control. The use of a rate lock can relieve you of much uncertainty while refinancing and/or purchasing and if timed correctly, it could save you money over the life of your loan.
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