12-Month Mortgage Rate Lock: Is It Worth It?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

A relative is trying to buy a new home from a homebuilder. The home will not be ready for another 12 months. The affiliated lender has made the following offer to lock in a mortgage interest rate for 12 months on their $400k loan:
1) $3980 non-refundable paid now
2) Interest rate is current market rate + 0.655%

Is there a way to ascertain whether this is a good deal or not? Are there any rules of thumb for extended rate locks that can apply here that would help in deciding what a possible counteroffer might look like?
Fat Lip
Posts: 49
Joined: Tue Aug 24, 2021 9:01 am

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by Fat Lip »

This does not sound like a great deal to me. The $3,980 fee adds about another 0.136% to the rate, assuming the mortgage is kept for 10 years. I assumed 10 years because few mortgages run the full 30 year term.

So the buyer is paying 0.79% over the market rate for this lock.

I'd also want to know how competitive the "market rate" being offered is. They might be able to find better elsewhere and save a bit more.

If it were me I would take the risk and fix the rate when the home is ready to move in.
DoubleComma
Posts: 2066
Joined: Sun Aug 23, 2020 2:23 pm

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by DoubleComma »

I am assuming this is large builder, building a track neighborhood, not a custom home. It’s the only place I’ve seen this extended lock option offered.

In order to know if it’s a good option of not I would want to also know if there is a rate float down feature? We were offered a 365 day lock on a 30 yr fixed for a new build recently that had the option for one rate reset (float down) if rate are to fall during construction.

The other thing to know is how long does this relative plan to live in the house.

The other thing we learned is just how competitive 10/1 ARMs are at the moment…in our situation.

We haven’t committed to a purchase, if we do we plan to gamble on floating the rate till it’s time to close a year from now and take a 10/1 if they remain this competitive.
humblecoder
Posts: 1531
Joined: Thu Aug 06, 2020 8:46 am

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by humblecoder »

Here is one way to approach it.

If you take the deal and then rates are lower when you close, you can always back out of the loan and go with another lender at a lower rate. You would lose the $3980 non-refundable fee, but if the rate is lower by enough of a margin, you may still come out ahead.

If rates are higher when you close, then stick with the loan at the locked-in rate.
User avatar
8foot7
Posts: 4427
Joined: Mon Jan 05, 2015 6:29 pm

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by 8foot7 »

LMK5 wrote: Mon Aug 15, 2022 5:26 pm A relative is trying to buy a new home from a homebuilder. The home will not be ready for another 12 months. The affiliated lender has made the following offer to lock in a mortgage interest rate for 12 months on their $400k loan:
1) $3980 non-refundable paid now
2) Interest rate is current market rate + 0.655%

Is there a way to ascertain whether this is a good deal or not? Are there any rules of thumb for extended rate locks that can apply here that would help in deciding what a possible counteroffer might look like?
Consider option 3, telling the homebuilder you're not interested in the build unless the rate is a current market par quote with no markup. Take advantage of the market weakness in new construction. Builders are buying down rates now; no reason to pay an add-on, lock or not.
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

Fat Lip wrote: Tue Aug 16, 2022 9:12 am This does not sound like a great deal to me. The $3,980 fee adds about another 0.136% to the rate, assuming the mortgage is kept for 10 years. I assumed 10 years because few mortgages run the full 30 year term.

So the buyer is paying 0.79% over the market rate for this lock.

I'd also want to know how competitive the "market rate" being offered is. They might be able to find better elsewhere and save a bit more.

If it were me I would take the risk and fix the rate when the home is ready to move in.
The market rate being offered is 5.5%. There is a strong incentive to use the affiliated lender because they are getting about $25000 to use for closing costs which includes using that money for a rate buydown.

Can you show me the math you used to determine that $3980 equates to adding 0.136% to the rate?
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

DoubleComma wrote: Tue Aug 16, 2022 9:25 am I am assuming this is large builder, building a track neighborhood, not a custom home. It’s the only place I’ve seen this extended lock option offered.

In order to know if it’s a good option of not I would want to also know if there is a rate float down feature? We were offered a 365 day lock on a 30 yr fixed for a new build recently that had the option for one rate reset (float down) if rate are to fall during construction.

The other thing to know is how long does this relative plan to live in the house.

The other thing we learned is just how competitive 10/1 ARMs are at the moment…in our situation.

We haven’t committed to a purchase, if we do we plan to gamble on floating the rate till it’s time to close a year from now and take a 10/1 if they remain this competitive.
Yes, it's from a major builder in a tract neighborhood. I'm not quite sure if they've been offered the one-time float down. I would assume they'd stay in the property for at least 5 years. Can you tell me how the 10/1 ARM works?
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

humblecoder wrote: Tue Aug 16, 2022 9:54 am Here is one way to approach it.

If you take the deal and then rates are lower when you close, you can always back out of the loan and go with another lender at a lower rate. You would lose the $3980 non-refundable fee, but if the rate is lower by enough of a margin, you may still come out ahead.

If rates are higher when you close, then stick with the loan at the locked-in rate.
If one does go with the extended rate lock and market interest rates fall, say, 0.5% over the 12 months, will the same lender lower the locked rate by the 0.5% or will they only fund at the rate that was locked in?
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

8foot7 wrote: Tue Aug 16, 2022 10:03 am
LMK5 wrote: Mon Aug 15, 2022 5:26 pm A relative is trying to buy a new home from a homebuilder. The home will not be ready for another 12 months. The affiliated lender has made the following offer to lock in a mortgage interest rate for 12 months on their $400k loan:
1) $3980 non-refundable paid now
2) Interest rate is current market rate + 0.655%

Is there a way to ascertain whether this is a good deal or not? Are there any rules of thumb for extended rate locks that can apply here that would help in deciding what a possible counteroffer might look like?
Consider option 3, telling the homebuilder you're not interested in the build unless the rate is a current market par quote with no markup. Take advantage of the market weakness in new construction. Builders are buying down rates now; no reason to pay an add-on, lock or not.
Unfortunately they already put down a good faith deposit of $7500, but they received a $50k credit on the home price plus 6% of the home price in incentives that can be used towards closing costs. One of my main concerns is the direction of home prices (Phoenix area). If they continue to soften and after 12 months similar homes are offered for far less, they'll need to walk away if the builder doesn't mark the house down to FMV at the time.
User avatar
Abe
Posts: 2572
Joined: Fri Sep 18, 2009 5:24 pm
Location: Earth in the Milky Way Galaxy

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by Abe »

LMK5 wrote: Tue Aug 16, 2022 3:10 pm
Fat Lip wrote: Tue Aug 16, 2022 9:12 am This does not sound like a great deal to me. The $3,980 fee adds about another 0.136% to the rate, assuming the mortgage is kept for 10 years. I assumed 10 years because few mortgages run the full 30 year term.

So the buyer is paying 0.79% over the market rate for this lock.

I'd also want to know how competitive the "market rate" being offered is. They might be able to find better elsewhere and save a bit more.

If it were me I would take the risk and fix the rate when the home is ready to move in.
The market rate being offered is 5.5%. There is a strong incentive to use the affiliated lender because they are getting about $25000 to use for closing costs which includes using that money for a rate buydown.

Can you show me the math you used to determine that $3980 equates to adding 0.136% to the rate?
Not sure if this is correct, but this is the way I did it. A $400k loan at 5.5% with 360 payments will amortize out at $2,271.16 payment. Since you are paying $3,980 up front that equates to paying 360 payments of $2.271.16 on a $396,020 loan ($400,000 less $3,980), so the interest rate on that is 5.59%.
Slow and steady wins the race.
humblecoder
Posts: 1531
Joined: Thu Aug 06, 2020 8:46 am

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by humblecoder »

LMK5 wrote: Tue Aug 16, 2022 3:15 pm
humblecoder wrote: Tue Aug 16, 2022 9:54 am Here is one way to approach it.

If you take the deal and then rates are lower when you close, you can always back out of the loan and go with another lender at a lower rate. You would lose the $3980 non-refundable fee, but if the rate is lower by enough of a margin, you may still come out ahead.

If rates are higher when you close, then stick with the loan at the locked-in rate.
If one does go with the extended rate lock and market interest rates fall, say, 0.5% over the 12 months, will the same lender lower the locked rate by the 0.5% or will they only fund at the rate that was locked in?
I would assume that they would loan you the money at the lower rate. I can't see why they wouldn't. But obviously, you need to ask the lender to confirm.

I am thinking that you logistics would be along the lines of:
1. Cancel the original mortgage application for the locked-in rate. Lender gets to keep your non-refundable fee
2. Submit a new mortgage application for the lower rate.

Now if the lender doesn't allow you to put in a new mortgage application at the lower rate, then you can always cancel your original mortgage application (#1 above) and then apply for a mortgage with a different lender.
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

humblecoder wrote: Tue Aug 16, 2022 4:16 pm
LMK5 wrote: Tue Aug 16, 2022 3:15 pm
humblecoder wrote: Tue Aug 16, 2022 9:54 am Here is one way to approach it.

If you take the deal and then rates are lower when you close, you can always back out of the loan and go with another lender at a lower rate. You would lose the $3980 non-refundable fee, but if the rate is lower by enough of a margin, you may still come out ahead.

If rates are higher when you close, then stick with the loan at the locked-in rate.
If one does go with the extended rate lock and market interest rates fall, say, 0.5% over the 12 months, will the same lender lower the locked rate by the 0.5% or will they only fund at the rate that was locked in?
I would assume that they would loan you the money at the lower rate. I can't see why they wouldn't. But obviously, you need to ask the lender to confirm.

I am thinking that you logistics would be along the lines of:
1. Cancel the original mortgage application for the locked-in rate. Lender gets to keep your non-refundable fee
2. Submit a new mortgage application for the lower rate.

Now if the lender doesn't allow you to put in a new mortgage application at the lower rate, then you can always cancel your original mortgage application (#1 above) and then apply for a mortgage with a different lender.
Great suggestions, except that the $25,000 in incentives is only allowable if you use the affiliated lender, so that in most cases negates looking outside for a different lender. But the bottom line here seems to be that the lock-in requirements are a little too punitive.
DoubleComma
Posts: 2066
Joined: Sun Aug 23, 2020 2:23 pm

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by DoubleComma »

LMK5 wrote: Tue Aug 16, 2022 3:12 pm
DoubleComma wrote: Tue Aug 16, 2022 9:25 am I am assuming this is large builder, building a track neighborhood, not a custom home. It’s the only place I’ve seen this extended lock option offered.

In order to know if it’s a good option of not I would want to also know if there is a rate float down feature? We were offered a 365 day lock on a 30 yr fixed for a new build recently that had the option for one rate reset (float down) if rate are to fall during construction.

The other thing to know is how long does this relative plan to live in the house.

The other thing we learned is just how competitive 10/1 ARMs are at the moment…in our situation.

We haven’t committed to a purchase, if we do we plan to gamble on floating the rate till it’s time to close a year from now and take a 10/1 if they remain this competitive.
Yes, it's from a major builder in a tract neighborhood. I'm not quite sure if they've been offered the one-time float down. I would assume they'd stay in the property for at least 5 years. Can you tell me how the 10/1 ARM works?
The ARM we were offered was a 10/1 ARM 5/2/5 from the builders preferred lender and came with a $10k credit at closing.

10 years it was fixed rate with payment based on 30 year amortization.

Year 11, the rate can start to adjust annually.

The 5/2/5 means on the first adjustment the rate can make an initial reset no greater that 5% higher than the original rate. In years 12-30 it can adjust up more than 2% higher than the previous years rate. And the final 5 means at no time can the rate be greater than 5% higher than the original rate.

In our situation we were offered several rate options from 4.825 to 5.5 at various points, this is a 20% down second home purchase. I believe the 4.825 cost 2 points and the 5.5 was essentially par, but with builder/lender incentive it covered the loan cost. Also, these rates are representative to what was available for us now, since we too are looking at new construction they are basically meaningless because who knows where rates will be 8-10 months from. There was no 365 day rate lock option for ARMs, even if there was I wouldn't take them up on it at these rates. The 30 year fixed rate was in the low 6s, and considering we will never own this house for 30 years its not a consideration.
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

DoubleComma wrote: Wed Aug 17, 2022 3:02 pm
LMK5 wrote: Tue Aug 16, 2022 3:12 pm
DoubleComma wrote: Tue Aug 16, 2022 9:25 am I am assuming this is large builder, building a track neighborhood, not a custom home. It’s the only place I’ve seen this extended lock option offered.

In order to know if it’s a good option of not I would want to also know if there is a rate float down feature? We were offered a 365 day lock on a 30 yr fixed for a new build recently that had the option for one rate reset (float down) if rate are to fall during construction.

The other thing to know is how long does this relative plan to live in the house.

The other thing we learned is just how competitive 10/1 ARMs are at the moment…in our situation.

We haven’t committed to a purchase, if we do we plan to gamble on floating the rate till it’s time to close a year from now and take a 10/1 if they remain this competitive.
Yes, it's from a major builder in a tract neighborhood. I'm not quite sure if they've been offered the one-time float down. I would assume they'd stay in the property for at least 5 years. Can you tell me how the 10/1 ARM works?
The ARM we were offered was a 10/1 ARM 5/2/5 from the builders preferred lender and came with a $10k credit at closing.

10 years it was fixed rate with payment based on 30 year amortization.

Year 11, the rate can start to adjust annually.

The 5/2/5 means on the first adjustment the rate can make an initial reset no greater that 5% higher than the original rate. In years 12-30 it can adjust up more than 2% higher than the previous years rate. And the final 5 means at no time can the rate be greater than 5% higher than the original rate.

In our situation we were offered several rate options from 4.825 to 5.5 at various points, this is a 20% down second home purchase. I believe the 4.825 cost 2 points and the 5.5 was essentially par, but with builder/lender incentive it covered the loan cost. Also, these rates are representative to what was available for us now, since we too are looking at new construction they are basically meaningless because who knows where rates will be 8-10 months from. There was no 365 day rate lock option for ARMs, even if there was I wouldn't take them up on it at these rates. The 30 year fixed rate was in the low 6s, and considering we will never own this house for 30 years its not a consideration.
I see. Yesterday the buyer was given a preliminary work sheet showing what they'd pay if they were to close in 30 days. It showed a 4.25% rate bought down from 5.5% with incentive money. I will have to take a look at any other fixed or ARM offerings when they get closer to closing, which won't be for at least 12 months as far as I can tell. They haven't even poured the slab yet.
DoubleComma
Posts: 2066
Joined: Sun Aug 23, 2020 2:23 pm

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by DoubleComma »

LMK5 wrote: Wed Aug 17, 2022 3:42 pm
DoubleComma wrote: Wed Aug 17, 2022 3:02 pm
LMK5 wrote: Tue Aug 16, 2022 3:12 pm
DoubleComma wrote: Tue Aug 16, 2022 9:25 am I am assuming this is large builder, building a track neighborhood, not a custom home. It’s the only place I’ve seen this extended lock option offered.

In order to know if it’s a good option of not I would want to also know if there is a rate float down feature? We were offered a 365 day lock on a 30 yr fixed for a new build recently that had the option for one rate reset (float down) if rate are to fall during construction.

The other thing to know is how long does this relative plan to live in the house.

The other thing we learned is just how competitive 10/1 ARMs are at the moment…in our situation.

We haven’t committed to a purchase, if we do we plan to gamble on floating the rate till it’s time to close a year from now and take a 10/1 if they remain this competitive.
Yes, it's from a major builder in a tract neighborhood. I'm not quite sure if they've been offered the one-time float down. I would assume they'd stay in the property for at least 5 years. Can you tell me how the 10/1 ARM works?
The ARM we were offered was a 10/1 ARM 5/2/5 from the builders preferred lender and came with a $10k credit at closing.

10 years it was fixed rate with payment based on 30 year amortization.

Year 11, the rate can start to adjust annually.

The 5/2/5 means on the first adjustment the rate can make an initial reset no greater that 5% higher than the original rate. In years 12-30 it can adjust up more than 2% higher than the previous years rate. And the final 5 means at no time can the rate be greater than 5% higher than the original rate.

In our situation we were offered several rate options from 4.825 to 5.5 at various points, this is a 20% down second home purchase. I believe the 4.825 cost 2 points and the 5.5 was essentially par, but with builder/lender incentive it covered the loan cost. Also, these rates are representative to what was available for us now, since we too are looking at new construction they are basically meaningless because who knows where rates will be 8-10 months from. There was no 365 day rate lock option for ARMs, even if there was I wouldn't take them up on it at these rates. The 30 year fixed rate was in the low 6s, and considering we will never own this house for 30 years its not a consideration.
I see. Yesterday the buyer was given a preliminary work sheet showing what they'd pay if they were to close in 30 days. It showed a 4.25% rate bought down from 5.5% with incentive money. I will have to take a look at any other fixed or ARM offerings when they get closer to closing, which won't be for at least 12 months as far as I can tell. They haven't even poured the slab yet.
Depending on how long they anticipate staying in property it might not be their best option to use the incentive to buy down the rate. That is of course what the lender wants so they get the money, however it might be better to use the incentive towards other closing costs. Especially if one believe that rates in general will settle down in the first couple of years where they can then do a no cost refi.
Topic Author
LMK5
Posts: 539
Joined: Sat Jan 05, 2008 7:43 pm
Location: Good Ole USofA

Re: 12-Month Mortgage Rate Lock: Is It Worth It?

Post by LMK5 »

DoubleComma wrote: Wed Aug 17, 2022 4:35 pm
LMK5 wrote: Wed Aug 17, 2022 3:42 pm
DoubleComma wrote: Wed Aug 17, 2022 3:02 pm
LMK5 wrote: Tue Aug 16, 2022 3:12 pm
DoubleComma wrote: Tue Aug 16, 2022 9:25 am I am assuming this is large builder, building a track neighborhood, not a custom home. It’s the only place I’ve seen this extended lock option offered.

In order to know if it’s a good option of not I would want to also know if there is a rate float down feature? We were offered a 365 day lock on a 30 yr fixed for a new build recently that had the option for one rate reset (float down) if rate are to fall during construction.

The other thing to know is how long does this relative plan to live in the house.

The other thing we learned is just how competitive 10/1 ARMs are at the moment…in our situation.

We haven’t committed to a purchase, if we do we plan to gamble on floating the rate till it’s time to close a year from now and take a 10/1 if they remain this competitive.
Yes, it's from a major builder in a tract neighborhood. I'm not quite sure if they've been offered the one-time float down. I would assume they'd stay in the property for at least 5 years. Can you tell me how the 10/1 ARM works?
The ARM we were offered was a 10/1 ARM 5/2/5 from the builders preferred lender and came with a $10k credit at closing.

10 years it was fixed rate with payment based on 30 year amortization.

Year 11, the rate can start to adjust annually.

The 5/2/5 means on the first adjustment the rate can make an initial reset no greater that 5% higher than the original rate. In years 12-30 it can adjust up more than 2% higher than the previous years rate. And the final 5 means at no time can the rate be greater than 5% higher than the original rate.

In our situation we were offered several rate options from 4.825 to 5.5 at various points, this is a 20% down second home purchase. I believe the 4.825 cost 2 points and the 5.5 was essentially par, but with builder/lender incentive it covered the loan cost. Also, these rates are representative to what was available for us now, since we too are looking at new construction they are basically meaningless because who knows where rates will be 8-10 months from. There was no 365 day rate lock option for ARMs, even if there was I wouldn't take them up on it at these rates. The 30 year fixed rate was in the low 6s, and considering we will never own this house for 30 years its not a consideration.
I see. Yesterday the buyer was given a preliminary work sheet showing what they'd pay if they were to close in 30 days. It showed a 4.25% rate bought down from 5.5% with incentive money. I will have to take a look at any other fixed or ARM offerings when they get closer to closing, which won't be for at least 12 months as far as I can tell. They haven't even poured the slab yet.
Depending on how long they anticipate staying in property it might not be their best option to use the incentive to buy down the rate. That is of course what the lender wants so they get the money, however it might be better to use the incentive towards other closing costs. Especially if one believe that rates in general will settle down in the first couple of years where they can then do a no cost refi.
This is true, but I believe the stipulation for the incentive is that it must be used on prepaid items at closing. So what I think is happening is all the closing costs are being paid by the incentive money and what is left over is being used to buy down the rate. Then the only thing that is left is the actual down payment at closing.
Post Reply