Don't Let Rates Get You, Lock It

When interest rates begin to go up on mortgages, having your rate locked in can really protect you until closing.

The average rate on a 30-year fixed rate mortgage has risen almost 1% in the past year. While the rise has been mostly gradual, many home buyers can't risk having their rate go up any between the application and closing on a home. They are already stretched as far as they can go to get into the home.

When you don't lock in your rate, it is floating with the market. A traditional rate lock is the lender's guarantee that your mortgage will have the quoted interest rate, points and other terms at closing.

A rate lock is usually set for a specific amount of time. If the home purchase isn't complete within the time limit, your rate will unlock. Then your interest rate can go up.

If you qualify for a given rate as the maximum mortgage amount you can receive, you are walking a tight rope. If interest rates rise before closing, you may have to add more of a downpayment or lose your financing. A rate lock will protect you from this.

When you lock in your rate in a traditional rate lock, if interest rates go down, you are stuck unless you pay additional costs. Some lenders offer "float down" options that will let your rate lower once if rates fall. But many of them will stick you back up to the higher rate if the rates rise.

The key to a rate lock is ensuring that you have everything in writing. Verbal locks aren't legal. If the lender says the rate is locked, make sure you get it in writing.

You should also pay attention to the pre-set time limit for the lock. In some cases, the lender may automatically extend your lock, but that doesn't always happen. Many will charge you a fee to extend the lock, often a percentage of the loan amount.

The rate lock contract should lock in as many costs as possible. This includes not only interest rates, but also points. The agreement should include you name, the lock's effective date, the agreement date, the lock cost, the rate and the loan terms that are locked in. There should also be an expiration date and time and any options upon expiration of the lock.

As soon as you see the desired rate for your mortgage, you should lock it in. This is usually found when you apply for the mortgage.

Before you set the lock-in period, make sure you have an accurate estimate on how long it will take to process the loan and close on the home. Once locked in, make sure that you push the lender and others to close on time. You can help by quickly returning phone calls and turning in any necessary paperwork as soon as possible.

The lock will cost you money. Some lenders will even charge you an up-front fee even if the loan doesn't close. Others charge a flat fee at closing. Some lenders charge a percentage of the mortgage amount, a fraction of a percentage point or a slightly higher interest rate for the rate lock. The cost varies depending on the options you choose and the mortgage program you qualify for.

Don't let rising interest rate surprise you at closing. Lock in your rate and worry about other things instead.

Best Mortgage Rates and ARMs

When you go to get a mortgage you may start hearing the term option ARM thrown around, and you may wonder what one is exactly. An option ARM usually has two primary characteristics: interest rates adjusting monthly and payments adjusting yearly. Traditionally, a borrower can choose the size of the payment that they are required to make. The way you choose is you can usually pick whether you want to pay interest only on your loan or, if you want to pay a minimum payment.

Option ARMs are usually seen as a good deal by a prospective home buyer because they have low payments in the first year of the loan repayment. Some buyers realize that with a lower payment in the initial years they can enter into larger loan than otherwise possible. A minimum payment in early loan years can result in excess cash flow for the borrower as well, if a house well within their budget is involved.

While option ARMs may have very low payments in their first few payment periods, it is important to understand that rates can and will rise rather quickly in a few circumstances. If you elect a low initial rate on the loan, the payments will begin to rise in subsequent payment periods to recoup the lenders principal and interest within the loan term. When you pay less in the beginning of the loan life, the payments will accelerate to compensate for low initial payments. Option ARMs work if you can secure higher income in future payment periods. However, if you don’t see expenses dropping or income rising in the future, you should be very careful when setting low rates in the beginning of the loan, because you can expect rates to rise in the future with a static income which may lead to default.

Deciding to enter into an option ARM mortgage should be a well researched decision. Paying very little in the beginning is not the best option for the majority of people. Making payments as large of possible in the first few years is generally advisable so payments don’t really start to jump in years after low payments. Always comparing rates from competing lenders is crucial to getting a reasonable rate for the risk that you manifest. Settling on mortgage rates is not a good idea- get multiple rates if possible. While you want a low rate, you don’t necessarily want a low rate to translate into the lowest possible payment in the beginning of your ARM, because payments will potentially increase.

Lending institutions generally derive the rate they charge you by adding interest onto some average lending rate. Understanding how to keep this additional cost reasonable is key to making an option ARM manageable. This additional cost to you is know as the margin, and this information is not necessarily going to be relayed or shared with you as it is how the lender makes their profit. The best way to ascertain a reasonable margin for your risk profile is to get quotes from several institutions so you have relative comparisons.