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How To Know If A Mortgage Rate Lock In Is Right For YOU! |
| Lewi Glenis |
A mortgage rate lock is a contractual mechanism that is put in place to protect borrowers from a price increase between the date of closing and the mortgage rate lock in date.
Most mortgage lenders specify only the interest rate and points for mortgage lock-ins dealing with fixed rate mortgages or FRMs. A point is a percentage of the total loan amount charged up front by the lender. A mortgage lock will not include the lenders fixed dollar fees. For example, if the mortgage loan market turns against the favor of the lender, they can recoup some of their loss by increasing their fees... ie. They end up having to close a 4.25% mortgage rate in a 5% market.
Of course the above paragraph will conjure resentment among those lenders who would "never lower themselves to such standards". So then, "why not include your fixed dollar fees in your mortgage rate locks?"
However, as mandated by the Federal Reserve, lenders are required to include the APR whenever the interest rate is mentioned in any documentation... this is called Truth In Lending! The APR includes the interest rate, points, and all fixed fees and documents the actual cost to the borrower on a loan.
Mortgage rate lock-ins become even more intricate when dealing with adjustable rate mortgages or ARMs.
There are two kinds of rate caps on most ARMs. To reduce the amount of any interest rate change, an adjustment cap is used. A lifetime cap is applied to set the maximum interest rate over the life of the mortgage loan. Pay extra close attention to the following information, because a slight oversight pertaining to any ARM adjustment could cost you "big-time" in the future.
If you have an ARM that holds an assigned rate for 3 years or longer, you will most likely be dealing with two adjustment caps... the first applys to the first interest rate adjustment, and the second applies to all following adjustment periods on the loan. For example, a 2/2/5 means that the first adjustment cap will be 2%, the second adjustment cap will be 2%, and the lifetime cap will be 5% higher than the initial interest rate.
Now here's where it gets tricky... If your lender moves you to a 5/2/5, the first adjustment cap would be 5% instead of 2%! If interest rates happen to be much higher at the time of your first rate adjustment, this single action could cost you an arm and a leg for the duration of your loan.
It is common when locking ARMs for a lender to lock-in the originating interest rate, points, the margin (the rate adjustment amount added to the rate index), and the maximum lifetime rate on the final rate adjustment. Though it varies from borrower to borrower, the above criteria is considered to be the final price of the ARM. In addition, just like FRMs, the fixed dollar fees aren't assessed.
Since rate adjustment caps are thought of as part of the ARM program applied for, they are not included in a mortgage lock-in contract. Other features not included in a mortgage rate lock may include the term of the loan, the initial rate period, the rate index, and the following rate adjustment period.
In any circumstance where a loan officer changes the first adjustment cap, (ie. 2/2/5) either intentionally or by mistake... (mistakes do happen), the lender should most certainly reconcile the mistake on their end. Once you are locked in, the lender can change the program terms you may be participating in by raising the first adjustment cap (ie. 5%). However, because you are locked into YOUR active agreement, the lender cannot impose the new program terms on you since you are currently protected under the terms of your documented mortgage rate lock.
You can find many more resourceful articles to research mortgage options further by visiting http://www.home-life-loans.com .
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| About the Author |
©2005 All rights reserved
Lewi Glenis, Tucson AZ United States
http://www.home-life-loans.com/
Lewi Glenis is a successful Internet publisher and author currently managing 10 websites as part of the Home Life Network. The Home Life Network is a network of websites providing consumer and finance related information services and publications. Content topics include financial news and personal finance, consumer product reviews, personal growth, advanced learning strategies, innovative marketing solutions, and search engine optimization consulting. Lewi likes to spend his free time composing music and exploring remote areas of the great southwest.
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