Lock or NOT Lock??

 

What is a "rate lock period"? How does it work? How can you make sure your rate is competitive?

A rate lock or a rate commitment is a lender's promise to hold a certain interest rate and a certain number of points for you for a specified period of time while your application is processed. This prevents you from going through your whole application process and at the end of it finding out the interest rate has gone up. 

What you may not know, is that rates change daily and sometimes in a volatile market they can change hourly!  Locking your rate guarantees your rate ... but that's assuming you can close within the specified lock period.  For example,  you would not want to lock your rate for 30 days if you have agreed to a 45 day escrow period.  In a stable market, generally speaking, waiting to lock until the last minute - or floating- will result in a lower rate.  Typically to guarantee your rate for 30 days, you will incur charges of .25 points (1/4 of one percent of your loan amount) and to lock for 45 days will incur a cost to you of .5 points.  This can also be represented with a higher interest rate to avoid the up front costs or points. 

Built into your interest rate is the profit for the Bank or Mortgage Company.  Mortgage professionals use a variety of wholesale lenders who understand that it is much more profitable for them to use a wholesale brokerage firm to place their loans than to use in house processing staff, therefore, they offer their money to Brokers at a discount and pay commissions.  This is one reason why rates can vary dramatically from one company to another which is one of the reasons why it is so very important to get your rate quotes in writing and find out what the APR is.  (see below)

There are many ways besides opting for a shorter rate lock period to get a lower rate, though. A larger down payment will result in a lower interest rate than a smaller one, because you're starting out with more equity. You can pay points to lower your rate over the life of the loan, but that means you pay more up front. For many people, this makes sense and is a good deal.  My complimentary comparison reports let you see whether this is a good idea for you.  If you are purchasing a property, sometimes asking the seller to pay points toward your rate reduction is more beneficial to you than a reduction in the purchase price.  Take a look at this example:

Closing costs are fees paid by the lender, which the lender in turn charges you to close the loan. Many people pay closing costs when they sign on the dotted line, but many finance their closing costs. Paying closing costs when the loan closes will reduce your interest rate.

Finally, the interest rate a lender is willing to offer you depends on your credit score and your income-to-debt ratio. If you have good credit and your income far exceeds your debt obligations, you will qualify for a lower rate.
 
What is the difference between your Rate and the APR?

The easy answer is that federal law requires the lender to tell you both.

The A.P.R. is a tool for comparing different loans, and it will include not only your interest rate, but all the costs associated with obtaining the financing, including points, origination fees, lender processing and underwriting charges, and other terms. While your 'base' rate is that which is used to calculate the monthly payment, The A.P.R. is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

The A.P.R. on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're variable rate in the first place!  However, the software I use to create my comparison reports factors in these likely market index changes based on historical values, giving you the most accurate APR calculations you will find. 

The lesson is, that A.P.R. can be a guide and certainly a good place to start, but you need a mortgage professional to help you find the truly best loan for you.

Note when you're browsing for loan terms that the A.P.R. will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that A.P.R.s on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time.