For most Massachusetts homebuyers researching lenders and home loan programs, the mortgage interest rate is one of the most important factors in deciding which lender and/or loan program to use to finance the purchase of a home.
Obviously, no one wants a mortgage interest rate that is higher than they could have secured with another lender. The mortgage interest rate is the proportion of a loan that is charged as interest to the borrower.
The good news is that lenders really don't have any incentive anymore to quote anything but their best interest rates. Many first-time homebuyers find articles on the Internet warning about something called the "yield spread premium," which was the practice of quoting a higher interest rate in order for mortgage professionals to receive a higher commission. The Federal Reserve Board issued regulations on August 16, 2010 that banned such practices.
So homebuyers have nothing to worry about when it comes to mortgage interest rates, right? Not exactly.
Mortgage interest rates can change daily, and rates sometimes change intraday. If your mortgage interest rate isn't locked, there isn't any guarantee what the interest rate on your loan will be at the time of closing. You have to be sure your lender has locked the rate. You should not ever assume your rate has been locked without confirming with your loan officer.
An interest rate lock, sometimes referred to as the "lock-in" rate, is a guarantee the lender will deliver a specific interest rate, if your mortgage loan closes within a specified time period. Typically, rate locks last for 30, 45 or 60 days, but they might be shorter or longer. A rate lock protects you, the borrower, from interest rate increases during the lock period; however, you will not benefit in most cases from a decline in interest rates during the lock period.
Homebuyers should understand that a longer rate lock likely will cost more money, either in the form of a slightly higher interest rate or some other cost. You should ask your loan officer up front what the cost to will be for a longer rate lock period. There is some risk involved in waiting to lock in. Waiting 15 days to save an eighth of a point with a 30-day rate lock (instead of a 45-date rate lock) could backfire, if mortgage interest rates increase during the 15-day period.
It is important that borrowers make sure the rate lock agreement is long enough to still be valid, if the closing is delayed a few days. There are many reasons why a closing might be delayed that are not necessarily the fault of either party or their representatives, such as a minor title issue. It's a risk to have your rate lock expiration date to be the same day as the closing deadline.
Although your lender may agree to extend the rate lock expiration date, it will cost you. The cost of a 10-day extension is usually one-eighth of a point. A point is a fee equal to 1 percent of the loan amount, so an eighth of a point on a $300,000 loan, for example, would be $375.
A lender might include a rate lock when it issues the Loan Estimate document. Borrowers should check at the top of page one of the Loan Estimate to see whether the interest rate is locked and for how long. If the rate isn't locked, it's not guaranteed. The Loan Estimate gives borrowers a tool to compare mortgages, but without rate lock information its usefulness is limited.
There are rare occasions when a mortgage rate lock changes. The most common reason is that you decided to change your type of home loan.