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By ROB POPOFF, Special to the Eagle
June 23, 2004
Unless you have a crystal ball, there is no way to precisely predict the direction of interest rates. With this in mind, many borrowers choose to lock in their interest rate for a little peace of mind.
What does it mean to lock your loan's interest rate? Mortgage rates are tied to movements in the financial markets. Since the financial markets are subject to uncertainty on a daily basis, there are no guarantees on where mortgage rates will be at any given time. When a homebuyer applies for a mortgage loan, the interest rate quoted at the initial application may not be available by the closing date — which can be a particularly unpleasant surprise.
For example, a borrower who applies for a 30-year mortgage loan of $500,000 when interest rates are 6 percent could expect his or her monthly loan payment (excluding taxes and insurance) to be $2,997.75. If the interest rate on the 30-year mortgage increased to 6.5 percent before the loan closed, the borrower's monthly payment would increase to $3,160.34.
Does this mean that you should lock your rate? The answer to this question depends on your risk tolerance: Are you willing to gamble on the rates? If you choose to float your rate, keep track of interest rate movements. One way to do this is to read the business section of your newspaper and keep tabs on economic reports and their impact on Treasury Bonds. The 10-year Treasury note and 30-year Treasury bond yields are good indicators of fixed mortgage rates, while the one-, three- and five-year Treasury note yields can be good gauges of the introductory rate on Adjustable Rate Mortgage (ARM) loans.
When locking in a rate, make sure you get the terms of the rate-lock in writing, and make sure you understand any fees and clauses that are associated with the agreement. How long is the rate lock effective? How much does it cost? Can the rate lock be extended in the event of delays in the loan process? Are lock-in fees refundable in the event the loan process is at a standstill?
Ask your lender what options are offered with respect to rate lock-ins. Some lenders may offer rate protection at no charge. Many lenders will allow the borrower to lock the interest rates further into the loan process. Some lenders will allow the borrower to lock the loan's interest rate, but will give the borrower a better rate if interest rates fall.
Regardless of which lock option you choose, make sure to maintain regular contact your lender during the application process to check on the status of the loan approval. Don't be afraid to call to check on the loan status — this will help assure a timely processing of the loan and prevent your lock-in from expiring before you close.
Rob Popoff and his partner, John Nachef, operate a mortgage production center on Marco Island. Their team has extensive experience in finance and lending. You can contact Rob at
rpopoff@fibna.com or (239) 642-4211.
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