Save Big by Choosing the Best Rate Lock

By
Mortgage and Lending with Fairway Independent Mortgage Corporation NMLS #395819, FIMC #2289

Closing dates and rate locksWant a lower mortgage rate on your upcoming Colorado Home Purchase? Think about moving up the closing date.

The reason is rooted in "rate locks", a bank's guarantee to honor a specific mortgage rate for a specific, finite period of time. Rate locks allow home buyers to reserve mortgage rates today even though their respective closings may be scheduled as far as a year into the future.

A rate lock is a contract. No matter what the "current market rate" is at the time of closing, the bank will honor the terms of the original rate lock.

It would be like making an agreement to buy Microsoft stock at a specific price 60 days from now. No matter what the price, you already know what you're paying for it.

In this sense, rate locks are predictions about the future and, meanwhile, as we all know, the future can be a challenge to forecast. Lenders know this, too, of course, so it's easy to understand why longer rate locks tend to be more expensive than shorter ones.

The longer the rate lock, the more risk to the bank.

To compensate for this "time risk", therefore, lenders typically step-up pricing for rate lock guarantees as lock period lengthen.

  • 15-day rate lock : The best of all pricing
  • 30-day rate lock : 1/8 percent extra cost versus the 15-day rate lock
  • 45-day rate lock : 1/4 percent extra cost versus the 15-day rate lock
  • 60-day rate lock : 3/8 percent extra cost versus the 15-day rate lock

One percent of "extra cost" is defined as one percent of the borrowed amount.

Now, this incremental price chart is just a rough guideline; exact spreads vary from lender-to-lender. Overall, however, it's fairly close.

That's why it's important to manage your closing date vis-a-vis your mortgage rate. Closing in 30 days versus 31 can save you an eighth-percent in closing costs. Assuming a loan size of $200,000, that's $2,500 saved.

So, when negotiating a closing date on a contract, keep in mind the math of mortgage rate locks. The shorter its length, the more money you might save.

Posted by

RJ Baxter- Branch Manager, Educator, Speaker, Mountain Biker, Broncos Fan, Snowboard Shredder, Father of Two Crazy Kids

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303-670-0137 (direct)

baxterteam@fairwaymc.com

165 S. Union Blvd, Suite 400

Lakewood, CO 80228

NMLS #395819, FIMC NMLS #2289

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Topic:
Lending / Financial
Location:
Colorado Jefferson County Evergreen
Groups:
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Realtors Needing the services of the Lending Powers
Colorado Real Estate
Colorado Realty Bloggers
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Tags:
closing date
lower mortgage rates
rate locks

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Rainer
284,368
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Hmm, that is interesting, since we don't charge for the client directly for the 15 and 30 day rate locks.  There might be a slight rate change, but many times there is no difference in the 15 and 30 days lock times.

Sep 21, 2010 12:53 PM #1
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Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

I think this is something that most consumers know very little about despite how important it is.

Sep 21, 2010 05:16 PM #2
Rainmaker
70,752
Loan Survivor Real Estate Financing Expert
Purchases, First Time Buyers, Pre-Approvals, Refinance - Birmingham, MI

Nice post.  You may also want to cover lock extensions in the future.

Sep 22, 2010 12:29 AM #3
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