People who are buying homes are often surprised by how quickly interest rates can change. This brings up the question of whether or not you should lock in your loan's interest rate.
Putting a lock on your mortgage's interest rate
In spite of what most people think, the Federal Reserve Bank does not set the interest rates for mortgage loans. This is a reasonable assumption, though, since the media tends to go crazy every time the Chairman of the Federal Reserve says anything about raising or lowering rates. You should know that he is talking about the rate that banks will have to pay to borrow money from other banks. On the other hand, mortgage interest rates are set by, among other things, the bond market.
Because the bond market changes every business day, so do the mortgage rates. With a 30-year loan, even a small change can affect how much or how little money the lender will get back. To protect yourself from these changes, you need to know how to lock in your loan's interest rate.
Before the interest rate is locked, the mortgage cannot be finalised. If you don't talk to the lender about the problem, the rate can go up or down every day between when you apply for the loan and when you get the money. This can be as long as two or three months if you get pre-approved for a loan before you make an offer on a house. This kind of change is dangerous, especially if you are buying a home on the edge of your cash flow. If rates go up by half a percent while you're shopping, you might not be able to afford the monthly payments on the house of your dreams when you finally buy it.
To lock in a loan, you need to know the points and how long the lock is. The lender and borrower can talk about these things, and there is no standard that is required by law. Usually, you have to agree to pay a certain number of points to lock in a rate. The price goes up the longer you want to lock in the rate. You can expect to pay between a quarter and a half of a point for 30 days. Expect to pay half to a full point for a longer time. One point is equal to 1% of the total loan amount. If a lender tries to charge you more, you can get a loan somewhere else or work with a mortgage broker.
Changes in interest rates are dangerous because they can affect how much you pay each month. When you lock in your rate, you have a set number to work with when you buy your dream home.
