Mortgage interest rates are down to their lowest level in nearly a year, likely to get lower, but just as likely to reverse course at any time.
However, with a rate lock, you could freeze out higher rates or take a gamble on a lower, even more affordable rate.
Here's the scoop.
Just a week after the Federal Reserve unveiled a $600 billion plan to reduce mortgage interest rates to 4.5 percent for home buyers, the federal gambit appeared to be paying off.
Fixed interest rates (FRMs) on 30-year conforming mortgages dropped nearly a half percentage point to 5.53 percent by Dec. 4, according to Freddie Mac's weekly survey. The 30-year FRM has not been lower since Jan. 24, 2008, when it was 5.48 percent. The FRM rate last week was also down more than a full percentage point from the 2008 high of 6.63 percent in July.
Even if the Fed's effort peters out, squeezed by an economy that appears to be resisting jump starts, rates could get lower because the U.S. Treasury Department is weighing in with its own efforts to push rates even lower than 4.5 percent. Unlike the Fed's program, which targets only homebuyers, the Treasury's program would include lower interest rates for homeowners who want to refinance.
Still more downward pressure on rates comes from President-elect Barack Obama who has repeated his desire to see more of the existing $700 billion bailout and other funds funneled directly to struggling homeowners.
Lower interest rates can make housing or a refinance more affordable.
A 6 percent interest rate on a $250,000 mortgage costs about $1,500 month in principal and interest; about $1,400 at 5.5 percent and $1,270 at 4.5 percent.
When rates get as low as you need them to go, they could just as quickly reverse course and leave you twisting in the wind -- unless you've got a contracted mortgage rate lock in your pocket.
Rate locks avoid higher costs
A written and signed mortgage rate lock contract can be your ticket to ride.
Rate locks are typically designed to protect homebuyers from rising rates, but those refinancing for lower rates can also benefit.
A traditional mortgage rate lock is a lender's guarantee that your mortgage will come with a specific interest rate, points, other costs and terms.
A rate lock's terms also include a specified period for the lock. The benefits of the lock are only good for as long as the term of the rate lock.
If you fail to complete your home purchase or don't refinance before the clock runs out, and interest rates rise, you could have to pay any higher costs.
Higher costs can include a higher mortgage rate, more points, and even more up front cash down. More cash down may be necessary to keep the actual amount financed low enough so your monthly payments remain in line with what you can afford or what the lender will allow.
Likewise, if you are refinancing to stave off foreclosure and miss the deadline, you could lose your home if the lender won't approve you for a higher rate.
In a refinance where your home is not at stake, you've got some wiggle room. You can take out less cash, wait out the market or otherwise cope.
Locks can also push costs down
You can also benefit from a rate lock when interest rates are falling.
If interest rates fall during the lock period, you can't take advantage of the lower rate unless you rewrite the lock at additional cost or initially include a "float down" provision in the original lock.
The "float down" option grants you a lower rate if rates fall within a given window of time. Again, unless otherwise contracted, float down rate locks stick you with the higher rate if rates rise during the lock period.
You may be able to negotiate for a float down that also has a specific rate lock so you don't pay a higher rate, but you'll pay through the nose for the lock because the lender is taking on greater risk.
Solid contract necessary to lock or float
Myriad rate lock variations underscore the importance of being sure the language of the lock contract gives you the specific options you need for a sufficient term.
Getting it in all writing removes the potential of trying to enforce a verbal agreement should a dispute arise.
The contract should lock in the interest rate, points and other costs, whenever possible. The agreement should include your name; the lock's effective date; lock cost; what terms are locked; the lock's expiration date and time; and any post-lock options.
Lock as soon as you see the desired rate or "on application" -- when you first apply for the mortgage -- so that your rate is locked as you spend time getting the application approved. That's particularly important if you barely qualify at today's rates, and an increase would make buying unaffordable.
Of course, you can choose to set the lock "on approval," especially in markets where loan application checks are prolonged due to heavy demand for housing or in markets like today's market of heavily scrutinized applications.
In any event, the lock period should be long enough to allow for settlement, contingencies, and other potential delays. Locks average 30 days, but can range from 15 to 60 days. Obviously, the longer the better, but the longer the more expensive the lock can be.
Devil in the details
• Locks can cost money. Shop around for both the terms of the lock contract and its cost, which varies from lender to lender. Some lenders want up-front lock fees. Others take them at settlement. There are non-refundable fees, flat fees, and fees based on a percentage of the mortgage, and a host of variations.
• Before settling on a lock-in period, determine the average time for loan processing in your market. Ask your lender to estimate the time necessary to process your loan. Verify the information with other realty and mortgage professionals. If the loan doesn't close on time, lenders can extend your lock for free or charge more.
• Once you lock-in a rate, if you haven't already, quickly submit the application and other required documents. You should have previously checked your credit report, prepared income, job, debt, asset and other documents to back up your application information. You should also stay in close contact with the lender to be sure the application is progressing quickly.
• Verify the rate lock is from the bank, mortgage lender, credit union or other entity actually writing the loan, not a broker, loan officer or go between. A broker can obtain a rate lock from the lender, but he or she can't actually write the lock.
• If you have a floater, keep an eye on the market to determine when to grab a rate.
• The Federal Reserve's"A Consumer's Guide To Mortgage Lock Ins" offers extensive rate lock information and your local or state mortgage regulatory agency may offer specific rules lenders must follow when granting rate locks.
Broderick Perkins parlayed 30 years of old-school journalism into a digital real estate news service, the DeadlineNews Group, offering "News that really hits home!"™. The Silicon Valley bootstrap includes the Web site DeadlineNews.Com and the back shop Deadline Newsroom. Contact him at firstname.lastname@example.org.
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