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Many people purchasing homes are surprised to learn how quickly interest rates can change. This brings up the subject of locking in the interest rate on your loan.

Locking In The Interest Rate On Your Mortgage

Contrary to popular opinion, interest rates for mortgage loans are not set by the Federal Reserve Bank. This assumption, however, is understandable given the uproar one tends to see in the media every time the Chairman of the Federal Reserve makes any mention whatsoever about raising or lower rates. Of course, you should understand he is discussing the rate that will be charged by banks to borrow from other banks. Interest rates on mortgages, on the other hand, are set by the bond markets among other indicators.

Since bond markets move every business day, the mortgage rates move in a corresponding matter. Even a tiny change can impact how much or little money a lender will recover given an assumed payback of a 30-year loan. To protect yourself from these fluctuations, you must understand how to lock in the interest rate on your loan.

A mortgage cannot be finalized until the interest rate is locked. If you dont address the issue with the lender, the rate can move up or down every day from application to the actual funding of the loan. This can literally be two or three months if you are getting pre-approved before making an offer on a home. This kind of volatility is dangerous, particularly if you are pushing the limits of your cash flow in buying a home. If rates increase half a percent while you are shopping, you may be unable to make the monthly payments when you finally buy the property of your dreams!

Locking in a loan is all about points and the length of the lock. These issues are negotiable with the lender, to wit, there is no legally required standard. To lock in a rate, you often must agree to pay a percentage of points. The longer you want to lock in the rate, the more you pay. For a 30 day period, you can expect to pay a quarter to a half of a point. For a longer period, expect to pay half to a full point. A point is one percent of the total loan. If a lender tries to charge you more, take your loan elsewhere or get a mortgage broker involved.

Fluctuating interest rates are dangerous since they can impact your month payments. Locking in your rate gives you a definitive figure to work with when buying your dream home.

Over the last few years, thousands and thousands of homeowners have financed or refinanced their homes with ARM’s, Adjustable Rate Mortgages.

ARM’s are mortgages that are tied in to lower interest rates in the beginning so that many homeowners can afford their monthly payments. As long as interest rates stay even or go lower, the home owner is fine. The danger comes when interest rates start to rise. Monthly payments can go up hundreds of dollars when the interest rate/payment terms come into effect.

That danger is now. Interest rates have been going up as The Federal Reserve has raised rates for the 15th time in the last two years. And, it doesn’t look like rates are going to stop going higher anytime soon. As these mortgages reset to higher rates and payments, many of these ARM homeowners are going to be in a financial bind. Many may even lose their homes.

According to the Mortgage Bankers Association at the end of 2005, some states such as Michigan, Missouri, Tennessee and Alabama have as many as 20% of the ARM homeowners behind by thirty days or more. Foreclosure proceedings usually start when a homeowner is ninety days late. Hopefully, these homeowners will get refinanced before it is too late.

If you have an ARM, you should look at your finances to be sure you will remain solvent in these upcoming times. How high can your monthly house payment go? Will you be able to afford it? Talk to a financial adviser and determine if refinancing to a fixed rate is the best way for you to go. I believe locking in a fixed rate is the safest decision you could make at this moment in time.

There are many mortgage companies that will look to provide refinancing options for you. Unfortunately, many of these companies may be much more stringent in regards to your credit worthiness. That is, it may be much harder to borrow that money now than when you initially purchased your first or second mortgage. You will never know unless you try and the clock is ticking.

Too good to be true? It probably is. The Adjustable Rate Mortgages (or ARM in industry lingo). These guys can be a wolf dressed in sheep’s clothing and if you aren’t careful they are going to take your home away from you!

An Adjustable Rate Mortgage works this way. Initially, you are probably going to be paying anywhere from 2 – 3 % below the current market interest rates on your mortage. For most people, this allows them to purchase a bigger house, one that would normally be outside their price range. The normal reasoning is that by the time the loan adjusts they will be earning more, the economy will be better, etc.- which could be a year from now, or as much as 7 – 10 years from now –

Sometimes it just isn’t that way. In no time, we went from two incomes to one or we just aren’t making as much as we were. Worse still, interest rates rise and when it comes time for our ARM to adjust it goes up.

Some Adjustable Rate Mortgages changes every year based off current interest rates set by the Federal Reserve. Sometimes, this can be a good as interest rates may have fallen and you could end up paying in interest than you were at the start of your loan.

There are other ARM’s that adjust after a number of years – say 7 to 10. When they finally commit themselves, it can be a real sticker shock for the homeowner. If they haven’t planned for this financially it could mean the difference between them keeping or losing their home because monthly mortgage payments could double in size depending on how low your interest rate was before the adjustment and what current interest rates are.

So what’s the best decision that most smart home owners make? Go with conventional mortgages that have a predefined interest rate that is locked in over the life of the loan. If market conditions allow, you can always look into refinancing your mortgage and getting a lower interest rate.
Adjustable rate mortgages are good for those who like to take risks – and some argue they are good for families just starting out who know they will need a bigger house in the future and will have larger incomes in the future as well. However, as we all know, nothing is as certain in life as change and sometimes the smart homeowner knows when to play it safe and keep a roof over his or her head!