Are you locked in?
If you are gearing up to begin the home buying process and have been watching the mortgage interest rates – you’ve probably heard this term a time or two.
Not so long ago it used to be a dice roll for the home buyer as to when they should lock in their interest rate. Today however, with mortgage rates at historical lows; anything below 6% is a good value. Remember that when you are shopping for a mortgage loan – the rate you are quoted is not necessarily the rate you will pay when you go to the closing table. The lender will charge you the interest rate based on what the Federal Reserve determines for the market.
Watching, reading or listening to the news for the current interest rate – the rates change daily – sometimes twice a day – up or down. No one knows.
What does the term mean?
When you “lock-in” your interest rate – you agree to pay that interest rate for the lifetime of the loan (or as long as you own the house) without the worry of your interest rate adjusting based on the ups and downs of the market.
Check with your lender about their policies. The majority of all lenders will accept a telephone call and verbal authorizations to “lock-in”; others might require a written form.
What other decision do you need to make?
Other than a “locked-in” rate you need to decide how long to hold those rates - 30 or 60 days? Based on the lender’s policies – ask if there is a charge to hold the rates. As you get closer to closing you need to check with your builder to ensure your home is on track to completion.
Who sets the rates?
The interest rates are set by the Federal Reserve; and unless you plan on making mortgage banking a career – don’t even try to figure out how they are set. The main thing to remember is when you hear on the radio or news “the Feds are slashing rates” don’t get too excited – those rates are generally for short-term loans in order to stimulate consumer spending on retail items – buying a car, etc. They don’t generally affect mortgage interest rates. In spite of what you have been told – mortgage interest rates are set based on mortgage bonds and securities – not Treasury Bills and it’s a very complex process.
Questions to ask the lender about “lock-ins” before deciding to do business with them:
1. Is the interest rate you are quoting me now guaranteed at closing or do I need to lock-in at some point?
2. What are the fees to lock-in?
3. How long can I lock in my rate?
4. What happens if the deadline passes and I have not closed yet?
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