By Dian Hymer
During the third week in March, interest rates on home mortgages increased by more than 0.5 percent. Borrowers who locked in an interest rate the week before were protected against the rate increase. Those who did not lock in a rate in time were stuck with a higher interest rate and a higher monthly mortgage payment.
Before the mid-March rate increase, mortgage rates were hitting new multi-decade lows following a string of negative economic reports. Then, the stock market staged an impressive rally in response to the outbreak of the Iraq war and assessments of a swift victory. Interest rates jumped as bond yields fell.
A lengthy war in Iraq or a stall in the economic recovery could cause interest rates to subside again. However, many economists believe that the recent cycle of decreasing interest rates may be coming to an end. If so, the general direction of interest rates could be higher rather than lower in coming months.
You can protect yourself against the threat of higher interest rates by locking in an interest rate. An interest rate lock, also called a rate lock or lock-in, is a guarantee from a lender to give you a certain interest rate even if rates move higher.
A rate lock is good for a certain period of time. If you close the loan within the designated time, the lender will honor your rate lock even if interest rates have moved higher since you locked in. However, if interest rates drop during this period, you may not receive the benefit of a lower interest rate.
House Hunting Tip: The timing and cost of a lock-in will vary depending on the lender and how far along you are in the mortgage approval process. Some lenders can lock you in at the time the mortgage application is submitted. Others require that your loan be fully approved before you can lock in.
Lenders usually charge a fee for a rate lock: the longer the lock period, the higher the fee. For example, suppose that you and a friend are both applying for mortgages with the same lender. Your loan is fully approved and you can close within 15 days. You will pay 1/4 point less to the lender than your friend who is just starting the approval process. He can't close for 30 days. If he needed 45 days to close, the rate lock would cost 1/2 point more than you are paying.
"Points" is a term lenders use for the mortgage original fee. One point is equal to 1 percent of the mortgage amount. So, an additional 1/4 point on a $200,000 mortgage is $500, and 1/2 point is $1,000.
When you shop for a mortgage, you'll be quoted the lender's rate on mortgages that are currently closing. This may not be the rate you'll be given on a mortgage weeks or months later when you close. Also be aware that you can lock in an interest rate as well as the points. Both may fluctuate between the time you inquire about a mortgage and the date you close.
The alternative to locking in a rate is to let the rate float. If you think that interest rates will drop between the time you apply for a loan and your closing date, you might prefer not to lock until closer to your closing date. However, there is always the risk that rates will increase more. A rate lock can give you peace of mind in an uncertain interest rate environment.
The Closing: If you do decide to lock a rate, ask the lender to put it in writing. It's difficult to enforce a verbal commitment.
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