It came up yesterday with a buyer client of mine who called and asked if he should lock in his loan. The circumstances of his particular transaction are a bit unique because he is buying a short sale and we are awaiting the sellers banks approval, so the actual closing date is up in the air. Given those issues, deciding when to lock from a time-frame standpoint is difficult. I’d like to focus on locking your loan and buying points from a financial perspective and when it is a right time to lock your loan.
So, what’s a Point?
A ‘point’ in mortgage and loan lingo is typically 0.25%. Simple. If interest rates are at 6.5 percent, you can buy down your loan by purchasing points. So, for examples sake, a point on a $100,000 loan might cost you $1000. Lowering your payment from $632.07 (P+I) a month to $615.72 (P+I); saving you about $16 per month. Was it worth it? Well, depends on your personal circumstances but the important thing to remember is how long does it take to pay off that point. In our example, it will take 5years ($1000/$16). So, I might say I’d save the money for a paint job, but if it puts you out of affordability, it might be a decent idea.
So, what’s a Lock?
A lock is where you and your lender stick with an acceptable interest rate. Basically you lock it in. That lock generally will only last 30 days and if interest rates go up then you are hedged against the increase. Inversely, if they go down, you might miss out on the savings. If you decide not to lock, you are what they call floating. So, knowing when to lock is important, but understanding why and how you might be affected is even more important.
There are many places on-line you can go to get infomation on when to lock, and their advice is generally based on financial market news and they give you a scale based on particular time frames. I get what is called a ‘Daily Rate Lock Advisory’ emailed to me daily and I can send you one if you need to know whether or not to lock.
Back to my client. Given the caveats of his transaction, he’s floating because if we lock, his 30 day lock most likely will expire. He does have the option to extend the lock into a 60 day lock, but for a price: 1.5 points. Is it worth it for him do pay $3100 to buy and extended lock?
Lets work through it. Currently, he is borrowing 200k and is qualified at a rate of 5.75% and it would cost him 1.5 points to keep it there for 60 days. But, if his rate went up to 6.5 he could still buy down the rate for the same amount getting him back to where he would be if he locked. Trying to predict the future markets is a waste of time and guessing on whether rates will go up or down is big business. My advice would be to float it and if it nears 6.5-6.75 percent then I would lock for 30 days and buy down the rest back to the 5.75%. This is only an example and I would always talk with your lender that you trust and have them analyze your particular circumstances.
If you don’t have a trusted lender, give me a call and I will refer you to a great one!
Follow this link to the articles origin: A point about points: When to Lock
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