When it comes to getting a mortgage, you want the lowest rate possible. And if you’re risk averse, you probably want it locked in, guaranteed.
The primary purpose of that guarantee is to make sure that you don’t get stuck with a higher interest rate if mortgage rates happen to go up between the time you you apply for the loan and the time you get to the loan closing.
A lock-in or loan rate guarantee is a written contract. It is not an oral agreement. If it is not spelled out and signed by both parties, it is not a contract.
It also is important to remember that many loan rate guarantees include other conditions such as a time limit and a nonrefundable fee.
A lock-in should also spell out how many points you will have to pay on the deal. A point is 1 percent of the loan amount.
As anyone who has bought a house or paid attention to interest rates knows, mortgage rates fluctuate. Today, the rate might be 8 percent. Tomorrow it could be 7.5 or 8.25.
Those quarter points can make a major difference over the life of a mortgage and your monthly payment.
A 30-year, $100,000 mortgage loan at 8 percent, for example, means a monthly payment of $733.76 for interest and principal. That same mortgage loan at 7.75 percent would have a monthly price tag of $716.41, while at 8.25 percent it would jump to $751.27.
So if you’re locked in at 8 percent and the rate jumps to 8.25 by the loan closing, you are saving the difference–$17.51 a month, which amounts to $210.12 a year in lower payments.
In terms of interest charges, you would be saving $6,300 over the term of the loan.
But let’s say you lock in at 8 percent and mortgage rates go down to 7.75. The difference is about the same, $17.35, but your lender may not be able to pass these savings on to you.
Some people get more than a little bit upset when the interest rate drops after they’ve signed a lock-in. What they want is to be protected in case the rate goes up, but still be allowed to take advantage of a situation where the rate goes down.
It’s like calling a stockbroker and buying some stock at $100 a share, and then having the value drop to $90 a share. You cannot call the broker up and cancel the deal. You bought it. It is yours, and it is now worth $90 a share. It’s the same with a loan rate guarantee. You signed it. The rate is yours.
There are likely to be good reasons your lender won’t give you the lower interest rate. Many lenders get their money to make mortgage loans from outside sources (often by borrowing it or getting funds from investors).
If your lender does use money from outside sources, this is not necessarily bad.
It is a widely used business practice in the lending industry and it allows lenders to make more loans to consumers and helps to maintain a competitive lending environment (which usually means attractive borrowing rates for consumers).
In order to secure these large sums of money, however, a lender will either have to pay interest charges to borrow the funds or have to guarantee an investor an agreed upon rate of return.
The nature of these agreements will determine a lender’s ability to lower the borrower’s loan rate if interest rates fall after a lock-in contract has been signed.
Some lenders will let you have the lower rate. You may want to shop around for a mortgage company that will guarantee a lower rate if the interest rate does fall after you sign, but before the deal closes.
Before you sign a rate lock agreement ask the lender if such provisions, called float-downs, are available.
Others will let you out of the deal, but might charge a fee for the privilege. Any such fee will be disclosed in the original lock-in agreement, so read it carefully before you sign.
If mortgage rates fall and your agreement calls for paying a fee to back out of the deal, weigh your options carefully before making any final decision.
Let’s say your lender will let you out of the guarantee for a $1,000 fee or penalty. Now let’s apply that $1,000 to the example where the rate dropped from 8 to 7.75 per cent, which works out to $210.23 in savings a year.
If you pay the fee to get the lower rate, it would take almost five years to make back the $1,000 penalty. Is it worth it?
Ask yourself some questions. Do you expect to still be living there in five years? Do you even have an extra $1,000 to put toward the deal right now?
Plus, there are questions you need to ask regarding the other conditions spelled out in a guarantee: points, application or filing fee and time limit.
Important questions you must ask yourself have to do with how much time you really need to close the deal. Buying a house can drag on and on. Does the guarantee offer you enough time? If it doesn’t, how big is the filing fee? Can you afford to lose it?
Take all of these considerations into account if you are comparing rate lock agreements between lenders. A lender that offers float-down provisions and no penalty fee may charge you more for the privilege of locking in the interest rate.
If you think that interest rates will go up before your loan closes, locking in your mortgage rate may be a good option for you. Remember that the primary reason for locking in your mortgage rate is to protect you from rising interest rates.
If you feel that you should be entitled to the lower mortgage rate if they should fall, discuss this scenario with the lender before you sign any agreement.
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Jim DeBoth is president of Mortgage Market Information Services. Address your questions to Mortgages, c/o the Chicago Tribune, Real Estate Section, 435 N. Michigan Ave., Chicago, Ill., 60611. Sorry, we cannot accept questions over the phone and will not give personal replies.
