Homebuyers who want to slice a bit off their mortgage costs would do well to look into rate lock commitments – i.e., a bank's promise to honor a specific mortgage rate for a specific period. Here’s how to use your rate lock commitment -– and the calendar -- to engineer lower fees on your final mortgage bill.
In its purest essence, a rate lock is a lender’s guarantee to hold (or “lock in’) a specific interest rate and specific range of points for a specific range of time, while your mortgage loan is grinding toward a conclusion. Points are additional charges attached to the mortgage loan by the lender – one point equals 1% of the total loan amount.
Lock-ins come in handy because the mortgage loan process may take weeks to conclude. During that time, interest rates can and usually do fluctuate. So that 5.25% mortgage interest rate you thought you had in July may turn out to be a 5.75% rate you’ll actually receive in September – if you don’t lock in the better rate. By locking in the lower rate upfront, you’ll guarantee that rate when you actually sign off on the loan – no matter what happens with interest rates in the meantime.
Make no mistake, the money at stake is significant. Consider a $200,000 loan on a 30-year fixed-rate mortgage. At an interest rate of 5.25%, your monthly payment would be $1,104.41. At 5.75%, that payment rises to $1,167.15 per month. Over the course of a 360 month loan, the extra $62.74 amounts to $22,586.
A tip: when you get a rate lock commitment from your lender, get it in writing. A verbal agreement doesn’t hold much water if a dispute arises.
So how can you save money on your mortgage by picking the rate closing date? Again, a rate lock can save the day.
By and large, the longer the duration of your rate lock, the higher the risk to your lender. That’s because it’s more difficult to pinpoint mortgage rates 30 days from now than it is 15 days from now. Typically, rate locks are built in 15-day increments, with a 30-day lock as the benchmark for the actual pricing ranges. For example,
- 15-day rate lock : 1/8 percent lower than the 30-day rate lock
- 30-day rate lock : The basis for all other pricing
- 45-day rate lock : 1/8 percent higher than the 30-day rate lock
- 60-day rate lock : 1/4 percent higher than the 30-day rate lock
Under this rate structure, timing really does matter. According to Sam Thompson, senior mortgage loan officer at Opteum Mortgage, a 45-day closing – as opposed to a 46-day closing - may slash your mortgage rate by 0.125%. On a $250,000 mortgage, that would save you $236 annually, Thompson figures.
In general, the shorter your rate lock time period, the better you’ll do on mortgage rate savings. In addition, a rate lock timing strategy works as well on refinancing as it does on new mortgages.
So get to know rate locks, and aim for shorter closing periods. If so, chances are you can save some decent bucks on your mortgage loan.
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