Want a lower mortgage rate on your upcoming Corona home buy? 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 60, 90 and even 120 days in 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. 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.
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.
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 31 days versus 30 can cost you an eighth-percent in closing costs due to filing a rate lock extension.
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. But make sure you consult with a loan officer who understands the factors that move interest rates and watches the rate movement on a daily basis to help deciding when the best time to lock your rate is.
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