By Dian Hymer
With the threat of rising rates looming, some lenders are offering loan products tailor-made to relieve prospective home buyers of their rising rate angst. One loan product even allows you to lock in an interest rate for up to 120 days before you've found a home to buy. Even more innovative mortgage products are bound to pop up as lenders search for ways to capture mortgage business as interest rates rise.
Before jumping for one of these rate-savers, carefully weigh and consider the pros and cons. You rarely get something for nothing. For example, lenders charge for the privilege of locking in a rate.
An interest-rate lock, also called a rate lock-in, is a promise from a lender to give you a certain interest rate as long as you close the transaction within a designated time frame. If interest rates move higher during this time frame, you would still receive the lower promised rate, as long as you close on time.
The longer the lock period, the more you pay. For example, if you need to lock a rate for 30 days, might pay 1/4 point more than you'd be charged if you could close in 15 days. A 45-day lock-in might cost you 1/2 point more. One point is equal to 1 percent of the loan amount. So, 1/2 point on a $400,000 mortgage would cost you $2,000.
If interest rates were to rise significantly during your lock period, the extra upfront fee to hold the rate could be well worth it. If rates don't rise during the lock period, you will have paid too much.
Although a rate lock protects you against rising interest rates, it usually doesn't give you the benefit of a lower rate if rates were to fall rather than rise during your lock period. That is, unless the lender permits a "float down." With a float down provision, you're protected if rates rise, but you also benefit if they fall.
HOUSE HUNTING: Lenders can be clever with loan packaging. Some allow you to apply your lock-in fee toward your closing costs. Others build a "float down" into the rate lock. Whether either of these is a good deal depends on how much the loan costs, all things considered. A lock-in with a float down option may not save you a dime if the interest rate charged on the loan is 1/4 higher than another loan that doesn't offer a float down.
If you use a mortgage broker who works with a wide array of lenders, your broker may be able to move your loan package to a new lender if interest rates fall and your lock-in doesn't allow a float down. However, you could forfeit money if you switch. Some lenders charge an upfront nonrefundable fee to lock in a rate.
At the beginning of 2005, economists expected interest rates to rise modestly this year. Recently, interest rates moved moderately higher. When rates are poised to rise, it's wise to lock in to protect against an unanticipated spike in interest rates.
But, before locking in on a pre-purchase rate protection plan, find out if you will have the flexibility to move between mortgage products without having to incur additional fees. For instance, let's say that you lock in on a $300,000 30-year fixed rate mortgage. Then you fall in love with a more expensive house that you can only afford if you switch to a 5-year fixed or interest-only mortgage product. Some lenders will only let you lock a rate on a specific mortgage.
THE CLOSING: Buyers often don't know which mortgage product they want until they find the home they want to buy.
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