What's the POINT of Points, Rate Locks, and Floating Your Interest Rate When Obtaining Mortgage Financing in Chicagoland?

Not too long ago, I wrote a post asking for input as to topics I should blog about. Wow! I need to be careful what I ask for in the future. I got lots of great suggestions, and I'll be addressing some today and more in the future.

2 of the questions I received were from ActiveRain Member Michael Setunsky, Michael's Commercial, Northern Virginia. They were:

"When is it a good time to lock in a loan rate?" and ... "Can you explain how points work?"

Both great questions, Michael!

Many of those I speak to are somewhat confused about both topics at the beginning of their mortgage process. Because of the great low Interest Rates we are presently experiencing, mortgage applicants are very eager to "lock in" their rate. They question me as to when I'll be taking that action on their behalf.

Understandable. But as the old sayings go ... "it's not so easy" and "timing is everything".

Interest Rates are typically locked in at 15-day increments. In other words, there are 15, 30, 45, or 60-day rate locks. Depending on the Closing Date set/within the Sales Contract ... and the "anticipated" loan processing time, the Loan Officer will discuss a rate lock with their Borrower, (typically) at the time of Formal Loan Application.

Some Borrowers choose to "float" with the market changes (hoping for a downward Interest Rate trend), or others will "lock" for the length of time necessary to process their loan and Close before the lock expires. Expired rate locks are a Loan Officer's and mortgage company's nightmare! There are costs associated with extending or re-locking an Interest Rate. (Obviously something both Loan Officer and company hope to avoid). An expired rate lock also can expose a Borrower to higher Interest Rates or additional costs.

Please Note: The SHORTER the term of the lock (15 or 30 days), the BETTER the margin or compensation is earned by the Lender. This also can result in a better Interest Rate for the Borrower.

As far as Points are concerned ... think of Points in this way:
1 Point = 1% of the Loan Amount
So if borrowing $300,000, a Point is equal to $3,000.

IF a Borrower chooses to pay that Point, it is with the hopes of lowering their Interest Rate over the term of their loan. A Borrower can choose to buy any portion of a Point (or more than 1 Point) to obtain a lower Interest Rate ... or to cover the additional borrowing costs that are charged typically to Borrowers with lower credit scores ... or if the loan is to an Investor and they will NOT be occupying the property.

Points are simply "upfront interest", charged at Closing and used to offset costs or purchase a lower Interest Rate. Since the Mortgage Lender or Loan Investor receives a lump sum of money right away, rather than an income stream of smaller amounts later, they are willing to lend their money at a slightly lower Interest Rate. Points paid are a benefit to both parties.

MOST times, a "Point" will typically "buy down" an Interest Rate by anywhere from 1/4% to 3/8%, depending on the daily market swings, mortgage pool investing, size, type of loan, and other factors.

I liken "locking-in" an Interest Rate to taking aim at a duck in a shooting gallery. It's like a Mortgage Lender is trying to hit a moving target. There simply can be no set formula for this scenario.

This is a great example of where working with an experienced Mortgage Lender, well-versed in the movements of the market, is extremely beneficial to Borrowers. Doing so can translate to real monetary savings realized by the Borrower.

* Have questions regarding Rate Locks, Points, or Mortgage service in New Lenox, Will/DuPage County, or elsewhere in the Chicagoland area? Contact me! I'll be happy to put my 36+ years of mortgage experience and expertise to work on your behalf.
I can be found at any of the following:
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gmundt@goapmc.com
www.genemundt.com
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