One of the considerations when applying for a home loan is when to actually lock the mortgage rate in. Of course those that do not lock right away are gambling with their future loan payment. More often than not the best time to lock a rate is right away.
The three consideration when looking at locking in your interest rate are:
* Interest Rate
* Length of the lock
Locking in on a rate does not commit the borrower to going through with the loan. The lock of the interest rate simply eliminates the risk of the borrower being open to market fluctuations. As a home buyer when your qualifications are tight the last thing you want to do is find out your rate has increased from 6% to 6 3/8%. An interest rate increase like that could be the difference between eating steak or macaroni and cheese on the weekends.
When a mortgage company or bank permits an extended lock-in period, the borrower will usually see either a higher interest rate or more points associated with the loan. The lender does this to minimize their own exposure to market risk. The borrower pays for the lender to take on this risk in the form of either a higher rate of more points.
As an example, a 30 day rate lock commitment may cost the borrower one half point, while a 60 day rate lock could be double that or one full point. If a borrower needed an extended lock period, but did not want to pay points, the lender could increase the interest rate instead. In this example, typically, a 60-day lock would have a higher interest rate than a 30 day rate lock. A point by the way is 1% of the mortgage amount. So if you are borrowing $200,000, one point would be equal to $2000.00.
Another reason why is it usually best to lock in a mortgage rate right away is that if rates do come down substantially most lenders are willing to renegotiate the rate. Why are lenders willing to do this? That's easy...they do not want to lose your business to someone else!
I know as a Realtor many times I hear my clients saying they heard that the Federal Funds rate just dropped or will be dropping and they assume that 30 year fixed rate mortgages will also be dropping. This could not be further from the truth!
There is a big disconnect between the Federal Funds Rate and fixed rate mortgage instruments. In fact many times when the Federal Funds Rate is dropped long term interest rates rise. The Federal Funds Rate is more closely tied to the adjustable rate mortgage. For a complete explanation of how this works see The Federal Funds Rate V.S. Fixed Rate Mortgages.
When you are getting a home loan the other important consideration you need to think about is whether to pay mortgage points or not. For an explanantion of when to pay points for a mortgage loan clink the link.
The above Real Estate information regarding when to lock your mortgage interest rate was provided by Bill Gassett, the team leader for the #4 RE/MAX Team in Massachusetts in 2007.
Bill can be reached via email at firstname.lastname@example.org or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 22 Years. Bill's office is conveniently located in the center of Hopkinton MA at 77 Main Street.
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