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HomeHomes
Published: 8/31/2006

Are you locked into a high mortgage rate?

ou locked in a mortgage rate a few weeks ago that you thought was fair even good and now mortgage rates are going down.

So here you are locked into a rate near 7 percent on a 30-year fixed, and today your lender is offering that same 30-year fixed for 6.625 percent. What are your options?

If rates had gone up by one quarter of a percentage point, you would consider yourself lucky. But now you re wondering how to get out of this jam.

The truth is, a deal s a deal. As Tom Pellinger, a senior loan officer with Home123 in Albuquerque, N.M., pointed out, If the lender locked the rate then, by agreement, that's the rate the buyer lives with. It's basically a gentleman's agreement: we won't raise your rate if it happens to go up before closing, and you won't hold our feet to the fire and ask for a lower rate if it goes down.

Locking in a rate is a gamble. Sometimes you win; sometimes you lose. But you might be able to:

Talk to your lender.

There are no rules governing this situation, so you have nothing to lose by asking. One loan officer we talked to suggested that the lender might be willing to split the difference with the borrower, just to keep in his good graces. If you re locked at 7 percent and the new market rate is 6.75 percent, they might settle on 6.875 percent. After all, the borrower will probably refinance within the next few years, take out a home equity loan or even buy a new house, and the lender would certainly like to have this business.

But not all lenders can do this, as it is more than just changing the rate. It could affect the lender s ability to sell the loan.

Secure a lower rate from a different lender

You would have to start the process all over again. This would only be possible only if you have sufficient time to go through another process. It would cost you the application fee that you paid the first lender, but if the savings were worth it, it might be an option.

Buy down the rate.

If the buyer decides to buy down the rate (pay discount points upfront to get a lower interest rate) from the locked rate, he or she normally can do that within a week of closing, Pellinger says. So, if the rate were locked at, say, 7 percent and one discount point (1 discount point equals 1 percent of the loan) would bring it down to 6.625%, the lender will most likely be more than willing to do that.

Whether you should do that is another story. The answer lies in the number of years you plan to live in the house.

Assuming a mortgage for $165,000, your monthly payment (principal and interest only) at 7 percent would be $1,097.75. After seven years your balance would be down to $150,393 and you would have paid $77,604 in interest. At 6.625 percent, your monthly payment would be $1,057.06 -- $40.69 less a month and after seven years your balance would be $149,508 and you would have paid $73,301 in interest. If you did buy down the rate, you would save $40.69 a month, or $488.28 over a year. But at that rate, you would have to live in the home almost three-and-a-half years just to recoup the $1,650 discount point you paid.

If you re buying a home you plan to live in for many years then yes, it is probably worth it. But if you only plan to live there for a few years, you might be better off keeping the higher interest rate and reaping the benefits of a slightly bigger tax deduction. To figure out the best option for your personal situation, visit the calculators at Interest.com and run some numbers for yourself.

The problem with locking a rate that turns out to be higher than a par rate at closing hasn t come up in a while. Mortgage rates have been marching higher for the better part of two years, and borrowers have been locking in their rates to keep from paying more.

But rates have made an abrupt turnaround in the last few weeks, falling on the hope that the Federal Reserve would halt its rate hike program.

You do not have to lock your rate. You could let it float for a while, especially when rates seem to be edging off their highs. A lender will generally lock your rate for free at application for 30 days it costs more the further out you go, say 45 or 60 days. But you could lock up to five days before closing.

There are definitely times when rates are climbing, and there are times when they are going down, but, as Pellinger says, There s typically as much of a chance of rates going up as there is of rates going down. If you are security-minded and want to sleep at night, you re might be wise to lock.

The reason most people lock is to guarantee that their rate will be there when it s time to close, because for some a higher rate could disqualify them for the loan.

Whenever you lock, get it in writing the interest rate, the duration and the cost. If you don t have it in writing, you don t have a lock you could go to court with, if it ever came to that.



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