Compare Mortgage Rates And Locking Them In
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When you compare mortgage rates many brokers and lenders will often quote you in good faith in regards to what kind of interest rate and mortgage program you qualify for. You will also be given the opportunity to “lock” in for an interest rate should you qualify.
When a mortgage broker quotes a mortgage rate before receiving all pertinent information from the borrower, the borrower should assume that the rate is not yet locked.
A rate lock and range from 15, 30, 45, and 60 days. 30 days is the most common rate lock, and longer lock periods are available. You may be required to pay additional fees for a longer lock period or if you go past your rate lock expiration date.
A lock, also called a rate lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
Shorter loans, such as a 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
A larger down payment greater than 20% will give you the best possible rate. With a down payment of 5% or less, you should expect to pay a higher rate as you are starting with less equity as collateral. If you’ve got the cash now and want to lower your payments, you can pay points on your loan to lower your mortgage rate. It’s a simple concept, really. In exchange for more money up front, lenders are willing to lower the interest rate they charge, cutting the borrower’s payments. Closing costs are fees paid by the lender, if you do not want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.
Your credit quality and debt-to-income ratio affect the terms of your loan through your FICO Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a good credit report, you will not receive the lowest available interest rate.
On a refinance loan, be sure to factor in the 3-day recission period. Typically, the loan must come out of recission by the lock expiration date or the rate lock will expire.
Depending on the market conditions, you may want to float your rate. To float means you will wait until you are closer to the loan closing to lock your rate. Since there are costs to lock farther away from the closing date, floating can save you closing costs. If the market is favorable, float your rate.
When purchasing a home it is important to make sure that the rate is locked in for a period of time that covers you through your closing date. Often you may shop for a mortgage before you find your home. In most cases until you are under contract for a purchase your rate will be “Floating”, which means it is not locked in.
It is a very good idea to ask for a copy of your rate lock commitment from your mortgage lender or mortgage broker after your rate has been locked. This will provide you with proof that your rate really has been locked and that there are no surprises at the end in regards to your rate being what it should be.
Be careful if you’re doing a refinance and your rate lock is about to expire. There is a 3-day recission period on refinance loans, and the loan must be out of recission before the rate lock expires, or you’ll lose your pricing.
Avoiding PMI Private Mortgage Insurance
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If you have ever purchased or refinanced a home that is over 80% loan to value you have probably heard the term mortgage insurance or are currently paying it. There are several ways to avoid paying or keep the cost of mortgage insurance down.
One way to purchase a home without mortgage insurance is to have an 80/20. That means your first mortgage is at 80 % and your second mortgage is at 20%.
There are many options to avoid mortgage insurance. Financing with 2 loans, LPMI (Lender Paid Mortgage Insurance)which is taking a relatively small rate bump, or by obtaining a subprime loan with a somewhat higher rate will all avoid PMI (Private Mortgage Insurance) If you plan on keeping your home for awhile and you are getting into a great low fixed rate another option is to pay a one time upfront MI (Mortgage Insurance) premium. By paying the one time premium you will be able to get a sizable overall discount of what you would have paid if you chose to pay mortgage insurance monthly. Also, lowering your mortgage term to a 20 year mortgage or a 15 year mortgage will heavily decrease your mortgage insurance payment.
To avoid Private Mortgage Insurance (PMI) on of the things that you may be able to do is to obtain a second mortgage. The lender will only require PMI on a mortgage that is 80% LTV or more and if you keep the first mortgage at 80% and get a second mortgage for the remaining 5-20% this will avoid the PMI.
There are programs with Lender Paid Mortgage Insurance (LPMI) . The rate is slightly higher, but it allows you to secure a mortgage over 80% and have the lender pay the mortgage insurance. Another benefit of this program is that the money you spend on a higher payment from the interest rate is tax deductible, whereas mortgage insurance is not.
If you get a low rate by paying mortgage insurance, it may well be worth paying mortgage insurance for the short term, if you plan on keeping your property for awhile.
Mortgae insurance is avoided in many “sub prime” and “alternative A” lending programs. Although the interest rates may be a little higher, the borrower must keep in mind that interest is tax deductable and the mortgage insurance premiums are not. Often when factoring in the increased tax deduction the sub prime type mortgage makes sense.
Talk to a loan specialist about our piggyback loan programs, which help avoid mortgage insurance entirely in most cases.
Mortgage insurance does not protect you, it protects the lender. If you can avoid having it, it is usually wise to do so.
Keep in mind that if you don’t have enough for a 20% down payment, but have some money to put down, that you can choose to do an 80/10/10 or a 80/15/5 and avoid Mortgage Insurance.
Mortgage insurance costs decrease over time as you gain equity in your home. If the value of your home has increased and the principal balance of your mortgage is at or below 80% of the market value of your home, you may be able to have the mortgage insurance removed. Contact your mortgage company for details
The piggybacked 1st and 2nd mortgage is also known as a combo loan. Some of the different combos are the 80/20 (most common) 70/30 and you may even see any variation of those such as 80/10/10 etc… The second loan on these are what they call self insured loans. Although the second loan will have a higher interest rate you will almost always come out better on a combo loan versus one loan with MI. A couple of reasons why: 1 – your insurance isn’t tax deductible where you interest payments on your second loan are. 2 – you can pay down your second lien off faster leaving you with a payment that is less once this is complete.
If you are currently paying for Private Mortgage Insurance premium on your mortgage, you may be able to drop the PMI coverage. Hire a certified appraiser to evaluate the value of your home. In most cases, a bank would not require PMI if the home value has increased so much where the outstanding loan balance is less than 80% of the increased value. Review your mortgage note or call your lender before ordering the appraisal.
Most people really don’t understand mortgage insurance and think it is something designed to benefit lender. Mortgage insurance, also referred to as private mortgage insurance (PMI), is the reason borrowers were first able to buy home with little or no money down. Loans with less than 20% down are considered high-risk loans and lenders didn’t make them before PMI. With the advent of PMI, the risk to lenders was lessened and they were willing to make loans with little money down.
