Q: Everyone I talk with about my house search tells me I need
to shop mortgages and lock in a rate. What do they mean?
A: If you're on the market for a house now, congratulations.
This is an historically good time to buy. Interest rates are low and prices are
rising in most markets. Even if it seems like a disorienting and confusing
process, home buying is worthwhile in the long run.
A rate lock is an agreement by a
lender to ensure a rate on a loan for a set period of time. Regardless of what
the mortgage market does before the closing date, the "points,"
duration, and interest rate will remain the same. The lock agreement is valid
until a few days after your expected closing date to account for any potential
complications and can be rejected only if some serious error emerges during the
qualification process.
When should I get a rate
lock?
Rate lock agreements are usually
offered for 30, 60 or 90 days. The longer term locks may seem like a good deal,
but they usually come with higher origination fees. A 30-day rate lock might
establish a 4.00% interest rate with a quarter point (or 0.25% of the value of
the loan). A 60-day lock on that same loan might include a half point instead
(0.50% of the loan).
It might be tempting to get your
mortgage rate set in stone before you've started looking at homes so you have a
good idea of your price range. As convenient as it sounds, doing so could cost
you in the long run. Interest rates don't change that fast. Over the past year,
interest rates have gone from a low of 3.55% to a high of 4.20%. The worst
month ever for mortgage rates saw an increase of about half a percent. That
raises your monthly payment $35 on a $250,000 loan. To save that $35 per month,
your lender may charge you $6,250 (a quarter point) up front! You won't make up
for that higher upfront cost for nearly 15 years. If, instead, you paid the
higher interest rate and put that money in a savings account, you'd make about
$2,000 over the life of your mortgage.
That said, ignoring your mortgage
rate until the day before closing is also unwise. Your lender needs time to put
together the paperwork for your loan. Ideally, you should get a rate lock
sometime between a week and a month before you close. A pre-approval process
should give you a good idea of your budget and can help your offer stand out in
a sellers' market. An easy closing transaction, instead of trying to time the
market, should be your priority here.
How do I lock my rate?
One of the wisest things you can
do in the home-buying process is to talk with your credit union to let them
know you are starting the process of buying a home. With many years of
experience in home lending, they can help you identify some good strategies for
determining the right home for you and streamline the process you'll be
following. They will also help you get started on pre-approval if appropriate
at that time. Then, once you've found the right house and you're ready to make
it yours, let them know you are ready to lock your rate. After signing an
agreement with your lender for the rate, points and duration, you're all set.
Why should I lock my
interest rate?
Locking your interest rate has two
big benefits. It helps you prepare your new monthly budget and it helps your
credit union get all the necessary paperwork in order for closing. Don't think
of your rate lock as a chance to score a deal. You won't save much money. In
fact, you could stand to lose quite a bit by trying. Think of it as a T-crossing
and I-dotting exercise. Having a rate lock on a mortgage means one less piece
of paperwork that stands between you and your new home.
If you'd like more information
about current mortgage rates, saving for a down payment, or anything else about
the homebuying process, reach out to your neighbors at LA Financial Credit Union Our
supportive staff is there to help you every step of the way, from setting a
budget to protecting your biggest investment. Call, email, or click your way to LA Financial Credit Union today!
Check our mortgage rates here.
Apply for a mortgage loan by clicking here.
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