Mortgage 101: Locking in your interest rate

If you’re taking the time to read this article you've probably figured out by now that there are quite a few steps involved with getting a home loan.  You’re ready to take one the challenge though.  You hate throwing away your rent money each month and want to secure some equity of your own.  You just might be ready to take on a mortgage and make the next big step in your life.  Congratulations!

It’s important when shopping around for a home mortgage to compare and look for the best interest rate between lenders.  However, the best rate is not the only consideration you should keep in mind. 

Will they work with my schedule, my credit score, my debt?

Is the lender going to provide me with the best product; 30-year fixed, home equity line of credit, etc?

You want a good rate and your lender should understand that.  That’s why it’s important to lock in your rate at the right time. 

WHY YOU SHOULD LOCK IN YOUR INTERST RATE

It’s very important to lock in your rate because the market is constantly changing and rates can easily go up at any time.  It’s a guessing game and if you don’t play right, you could pay the price.  Once you've chosen the lender you wish to work with and have spoken with a loan officer about the right product, you need to lock an interest rate based on the market at that time. 

A rate lock is a binding agreement between you and your lender, especially after you make a deposit to secure that interest rate.  It’s common for borrowers to see a falling interest rate based on the updated market trend and walk away from their locked-in rate, however, this is a very risky move.  It’s a precarious gamble because there is no way to accurately predict the market.  Just when rates go down significantly, they can shoot back up over night.  This is why it’s important to lock in rates right away and stick with your lock once you do. 

Rate lock’s do not have to be a scary thing.  Here at RANLife Home Loans, we will do everything we can to help ensure a low rate on your home loan.  We can offer rate lock extensions if paperwork takes longer than expected or other issues arise. 

HELPFUL FACTS ABOUT SECURING RATE LOCKS THROUGH LENDERS

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Mortgage rates don’t only change daily; they change throughout the day as well.  What you see on TV or in other advertisements might be outdated by the time you give your lender a call. 

Subsequently, you might not qualify for specific programs and qualify for others, depending on your credit score and other mitigating factors.  The only way to get an accurate rate quote is to call your loan officer and provide them with the necessary personal information to get a quote prepared. 

Know the Lingo

Rate quote – it’s exactly that, just a quote, no promises or guarantees.

Rate lock- a signed agreement with your specific interest rate

Rate cap - your rate lock could be anywhere up to that cap amount, but not above.  

Find a lender that will secure your rate lock and not delay the process.  You should be well aware of what’s going on throughout each step of your loan. 

Where to Start

First speak with your loan officer and talk to them about what’s been happening with rates that day or week.  Your loan officer should be able to give you their insight of the market and can advise you on the best time to lock in. 

Beware of how long your rate lock lasts.  Some are only good for 7 days and some up to 60 days, so be sure to plan ahead and coordinate with your closing date on your loan.  You’ll usually want to allow yourself at least one week of “wiggle room” in case of any last minute delays with your closing deadline. 

Knowing Mortgage Points

Your rate quote includes both the actually rate as well as mortgage points.  What exactly is a point? A point is equal to 1 percent of the loan amount.  So on a $200,000 loan, one point would equal $2,000.  There are two kinds of points - discount points and origination points.

Discount points are actually prepaid interest on the mortgage loan.  The more points you pay, the lower the interest rate on the loan and vice versa.  Borrowers can usually pay anywhere from zero to 4 points, depending on how much they wish to lower their rate.  This kind of point is also tax deductible. 

Origination points are charged by the lender to cover the costs of making the loan.  The origination fee is deductible if it was used to obtain the mortgage and not to pay other closing costs.  The fee is typically one percent with a normal lender. 

Your choice to pay points is based off of other factors such as how much money you have available to put down at closing and how long you plan on living in the home.   Points as prepaid interest reduce the interest and gives you an advantage if you play to stay in your home for a while.  However if you don’t plan on living there for that long, or want to pay the lowest amount in closing costs, choose the zero-point option on your loan program. 

Now that you know the basics about locking in your rate and the mortgage points you will be more prepared in the home buying process.  At the end of the day, your rate lock can drastically impact the amount of money you could save on your loan. 

Have any questions? Share them with us by commenting below or email them to info@ranlife.com  

You can find out more information about mortgage rates as well as compare rates between lenders by clicking here.