Interest Rate Tag

Until the interest rate is locked, the credit you receive (or the price you pay) for an interest rate can change minute by minute.  Once your interest rate is locked, as long as we close your loan within the allocated lock period, your interest rate and credit are secured.  Now, rather than worry about what is happening in the interest rate market, the focus will change to ensuring your loan closes within the allotted lock period.

Interest Rates and the Media

Between now and the time that your loan closes, you may hear the media talk about interest rates rising or dropping.  The truth is that the interest rate is not likely moving; but rather the credit or the cost to achieve that interest rate has moved.  In most cases, the change is minimal.  The media is very quick to alert their audience when mortgage pricing improves, but slower to act when the cost to achieve a particular rate increases.  In many cases, they will announce that rates are lower.  However, that may indicate that rates have decreased and are now back down to where they were a week ago.  Not truly a noteworthy headline.

What if Rates Drop after the Rate is Locked?

Generally speaking, once your interest rate is locked the pricing is set.  If there is a significant drop in interest rate (.25% or greater improvement), there are times when a rate lock can be adjusted.  However, we will always lock in a rate based on the best executed price for your situation.  Therefore, assuming the next best plan is .125% lower than the next best option, a rate movement of .375% is required before a change can be considered.  This is highly unlikely to occur within any lock period, and is not always an option regardless.  Therefore, the safe play is to consider your rate lock final once the pricing and interest rate have been locked in.

It is better to be locked and wish you were floating than be floating and wish you were locked.

Is a Rate Lock Final, Regardless of Loan Approval?

In order for a rate lock to be considered final, the loan must be fully approved.  If the lender with which we have locked in your rate denies your loan for any reason, the interest rate lock will be null and void.  If we are able to move a denied loan to another lender and get the loan approved, we will have to relock the loan based upon the market at that time.

Can Pricing for a Rate Change Once Locked?

The cost (or credit provided) to achieve a particular interest rate can change based upon credit score, loan-to-value and loan amount.  If there is a deviation from the original plan in any one of these details, the cost or credit for a particular interest rate can change.  The most common example is when an appraised value comes in lower than anticipated.  This may make the pricing for a particular interest rate higher or lower.  We will advise you should this become an issue with your loan. If you have any other questions, please let us know.  We are always here for you.

When structuring my client’s loans, I will typically recommend loan strategies with little if any closing costs.  Depending upon loan size and other factors, a no-cost loan may not be available.  However, a loan strategy where a significant portion of the closing costs are credited back to the borrower is most often an option.

I’m often asked how it is possible to refinance a loan without paying all of the closing costs.  A loan with limited closing costs seems too good to be true, so many become skeptical.  Below is a detailed explanation of how a Low-Cost loan works and the benefits it offers.  (NOTE:  City Creek Mortgage does not charge you any closing costs.  We are 100% compensated on a fixed income basis by our investors, not by our clients.)

A Low-Cost Loan Explained:

There are always fees associated with doing a mortgage.  Appraisers, title companies and underwriters all require  payment for their services.  On a typical $165,000 mortgage, the total for these is approximately $2,366.  Then, there is either a cost or a credit associated with each interest rate.  For example, , and a 4.125% interest rate may offer a credit of 1% of the loan amount.Alternatively, there are also interest rates that offer a credit.

Therefore, with a $165,000 loan, you will pay the following:

A 3.75% interest rate may have a cost of 1% of the total loan amount.

Basic Closing Costs $2,366
Cost for interest rate of 3.75% $1,650
Total Closing Costs $4,016

A 4.125% interest rate may offer a credit of 1% of the loan amount.

Basic Closing Costs $2,366
Credit for Interest Rate of 4.125% ($1650)
Total Closing Costs $716


Difference in close costs:  $4,016 – $716 = $3,300


The Benefits of a Low-Cost Loan:

When comparing a loan where someone is paying a higher level of closing costs to achieve a slightly lower interest rate, the loan amounts must be adjusted to reflect equal cash needed at closing.  In other words, if there is a difference in loan costs between the two options of $3,300, the Low-Cost option will have a loan amount that is $3,300 lower.  That will most effectively show the true cost of paying a higher level of closing costs to obtain a lower interest rate.  Therefore, we would compare a balance of $168,300 at a rate of 3.75% vs. a loan amount of $165,000 at a rate of 4.125%.  The results are as follows:

Full-Cost Option:     $168,300 @ 3.75% has a P&I payment of $779.42

No-Cost Option:     $165,000 @ 4.125% has a P&I payment of $799.67

By paying an additional $3,300 in closing costs, the monthly payment will be $20.25 lower than the Low-Cost option.

Therefore, the breakeven point is 162 months ($3,300 / $20.25 = 162.96 months).

If the loan will be in place for at least 13.5 years, then paying the fees for the lower rate may be the best option.  However, that is very rare and does not account for the option to move the rate lower again should interest rates continue to fall without losing the significant amount of closing costs paid for the loan.  Nor does it take into consideration the additional tax benefits the higher interest rate of a Low-Cost loan offers.

When buying a home there are a lot of decisions you need to make, but perhaps one of the most important is related to your interest rate: should you lock it in advance? Getting the best possible interest rate can help save you tens of thousands of dollars over the course of your loan. If you are in the process of getting a home loan approved and worried that interest rates might go up before you are ready to close, one option is to “lock in” your rate at the current low.

What is “Locking In” a Mortgage Rate?

Once you have a mortgage rate locked in, lenders must offer you a loan at that rate, regardless of what happens to rates between that time and when you close on the loan. There are a few restrictions on the process, though, including the time you can lock in a rate. Generally a lender will let you lock it in between 15 and 90 days before closing (at 15-day intervals). There is also a potential downside: if rates fall during that time you might be stuck with a higher rate.

To Lock or Not to Lock?

The decision of whether you should lock in an interest rate should be made based on your individual circumstances. Some of the main reasons you might consider locking in a rate include:

  • Reasonable expectation that interest rates will increase in the coming month(s)
  • Situations where even a small increase in the rate might cause problems for your budget
  • Deciding to refinance because current rates are much lower than the rate you have right now

The best way to decide whether you should lock in a rate is just to talk to your lender.

Timing Your Rate Lock

You can lock the rate as soon as you initial loan approval goes through, but it is time-limited, so most people wait until they have found a home they want to purchase to avoid having a rate lock expire before your closing date arrives. There is also a cost to locking in your rate for a longer term or if you lock it too soon and need to extend it, so you want to do it at the latest possible date to avoid these extra costs.

Working With Your Lender

The idea of a rate lock is to get the lowest possible interest rate for your mortgage loan, but what happens if you lock in a rate and then they drop again? In some cases you will have to go with the higher locked interest rate, but many times lenders have some flexibility and can work with you. However, since you did lock in a higher rate, the ability to lower it when market rates go down might come with a cost. If you locked in a little early and it expires before your loan closes you may be able to get an extension, but again, there might be fees associated with that.

There are also some situations where borrowers can lose their locked-in interest rate, the most common being a reduction in their credit score or a change in debt-to-income ratio. Keep that in mind, and don’t get into additional debt by racking up credit card charges, buying a new car, or taking out a new revolving credit line.

To find out more about locking in an interest rate and get your questions about the process answered, call City Creek Mortgage today.