Category: mortgage

Rate Lock

Rate Lock Loan

Interest Rates fluctuate daily. Real estate sales take 30 days or longer on average to complete. A rate lock guarantees the final interest rate of your loan. I can tell you from experience, that buyers are extremely upset when their final interest rate is higher then what they were initially quoted. Buyers feel like they got the ‘bait and switch’ tactic and it can put a real damper on the sale.

How do you avoid this? Talk to your lender as soon as you open escrow and tell them you want to lock in your interest rate! 

Lenders allow you to rate lock an interest rate for 30 days or 45 days.  If the escrow takes longer than usual- a rate lock can be extended.

free fee fallling

Rate Locks are not always Free! Lenders charge you a fraction of point added on to the interest rate to lock. For instance, if you are quoted 4.5% and you want to have a 45-day lock,  then the charge for your 45-day lock might be 1/8 percent higher and the rate you lock is 4.65%. 

Ever lender charges differently on rate lock so it is impossible for me to tell you exactly what they will charge. The longer the rate lock, the higher the risk to the lender that interest rates will go up and the higher charge. Here is a general idea of what you can expect on a rate lock:

  • 15-day rate lock: 1/8 point lower than 30-day rate lock
  • 30-day rate lock: The basis for all other pricing, origination fee only.
  • 45-day rate lock: 1/8 percent higher on interest rate than the 30-day rate lock
  • 60-day rate lock: 1/4 percent higher than the 30-day rate lock

If you go beyond your rate lock expiration you can purchase a 15 day or 30-day extension for an additional $300-$400.

Rate Locks work both ways. If the interest rate goes up you get to keep your locked rate, but if interest rates go down you can’t get the lower rate, you are stuck with what you locked. Sometimes the bank will give you the lower your rate but don’t count on it.

Buyers who believe that interest rates or going to drop sometimes decide not to lock in their interest rate- this is called “floating”. Floaters want to keep their options open. I never recommend to my clients to float because I have seen how quickly interest rates can swing in just one week, over 1/2% once!

Mortgage Brokers get more grief from rate locks than anything else- because although they can have an idea of what interest rates will do from experience, they have absolutely no control over it- so if the interest rate goes up while their client was floating or before they lock in the rate the client will be angry that they missed the good interest rate on their loan.

molehill-mountain

 

I always tell clients that you have to look at the big picture, the difference of an 1/8 or 1/4 of a point in interest rate is probably less than $100 a month on the payment so it’s not a total disaster. If rates go down substantially during your ownership, you can always refinance into the lower rate. I feel like a lot of the time the whole thing is blown out of proportion because buyers become obsessed with getting the lowest rate. The best thing to do is just lock the rate right away and don’t worry about it anymore.

Rate locks are given in writing. Make sure you get a copy of your rate lock from your lender in writing. If they tell you verbally they locked the rate but they don’t send it to you in writing, they may not have actually locked the rate but were going to, and then something came up and they got busy, then they forgot…. you get the point. Only when you have the rate lock in writing will you have the guaranteed rate.

Rate lock jpeg

Example of Rate Lock Confirmation

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Historic U.S. 30-Year Fixed Interest Rates

Interest is the cost the borrower pays to the lender for the benefit of using the principal. Since real estate is very expensive in Los Angeles, current entry-level prices are about $500,000 to $600,000 and go up to 100M, the majority of transactions are with loans. Depending on the year you can expect loans to be anywhere from 60% – 80% of property transactions in Los Angeles (more cash purchases in down markets from investor activity, and more loan purchases in up markets from retail buyers). Interest rates fluctuate daily and move according to the global economy, the US economy, and the stock and bond market. Interest Rates are very hard to predict!

Fed Chair Paul Volker had the courage to raise interest rates to an unheard of 21.5% in 1981 to snap the US out of hyperinflation which was 15% in 1980 and dropped to 3% by 1983

Mortgage Brokers and Lenders always watch the 10-year treasury market and Fed Policy meetings for insights into the direction of interest rates. A good lender should be able to offer some insights to buyers about the current interest rates and where they are heading. The 10-Year Treasury index is basically the stock market’s prediction on where interest rates are going. Sometimes the market is right and sometimes the market is wrong. Even if the market doesn’t decide interest rates- the Fed does, it is good to know what the market thinks because the Fed certainly pays attention to people’s expectations. The Fed sets interest rates. Whoever is the current Fed Chair (Jerome Powell right now) has a huge influence on policy decisions. The fed has 10 members total so the Chair isn’t the only one who votes but they have the most influence. Right now we are in the midst of a rate-cutting cycle. The Fed’s dual mandate is maximum employment and stable prices (mainly this is inflation which they like to see at 2%). Adjusting the interest rate is one of their main tools for accepting the monetary policy. Some of their other tactics are Bond Buying, Money Creation (governments have fiat power to print money), and Credit creation (the fed sets the bank’s reserve ratios).

Interest rates are expressed as a percentage. The Interest Rates are currently near all-time lows with 30 years fixed at 3.5% interest rate. In 2019, The Fed has been keeping a close eye on the economy, the current trade war with China and global manufacturing slowdown have them worried of a potential economic downturn in the US.  Unemployment is at an all time low at 3.5% and inflation is healthy at 2%, and GDP while slowing down from 4% in 2018 is still robust. The graph below was compiled from Historic 30 Year Fixed Rate Mortgage Data provided by FreddieMac.

See Also: Rate Lock, Amortization

 

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Preapproval

Lenders write Preapproval letters for buyers. If you are planning to purchase a property with a loan you will need a preapproval letter to include with your offer. The preapproval letter is proof to the seller that you have the financial capacity to qualify for a loan to buy their property.

Citi Bank Preapproval Letter

Citi bank preapproval letter example

Prospect Mortgage Preapproval Letter example

Prospect Mortgage Preapproval Letter example

The preapproval letter is a 1-page document. It usually takes four to five days to get pre-approved. The lender will want a filled out loan application w/ social security numbers, driver license numbers, past two years of tax returns, W-2 forms, pay stubs, and credit report- a whole bunch of other documents that they request. Sometimes it can take a couple days just to dig all this information up. Lenders verify borrowers’ credit, income, employment and other assets. The faster you get the lender your documents, the quicker you will get preapproved.

My advice to buyers is to get your preapproval letter as soon as possible – that way if you find a property you like you will be ready to write an offer. It should be noted that it is possible to get an offer accepted without a preapproval letter (I have done it before), but it is very hard. If the property has multiple offers, forget it, the seller will put all the offers without preapproval letters and proof of funds in the trash.

crumpled up paper in trash

Don’t let this be your offer, Get preapproved right away!

A great thing about getting preapproved for you as a buyer is that you will be able to talk with the lender. Your lender will be able to tell you how much you can afford, so you will know your maximum purchase price, and what your monthly payments will be. Sometimes it is better to spend less than the maximum price- I always say a 30 year fixed loan is 360 payments so make sure you are comfortable and not stretching too thin. For first time home buyers, you often have to stretch to buy your first property- so if you are stretching be willing to “rough it” for a few years as this sometimes just comes with the territory of buying your first home.

When you are talking with your lender, ask about interest rates, rate locks, closing costs, and different loan programs (FHA loans, VA Loans, interest only, 30 year fixed, 15 year fixed, Point loans, No Point loans), Private Mortgage Insurance.

With your preapproval letter in hand, you are ready to write offers!

 

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How to turn a 30 Year Fixed Mortgage into a 15 Year Fixed

Pay off your 30-year fixed-rate mortgage in 15 years (Or any

Many buyers are torn when deciding between getting a 15-year or 30-year fixed-rate mortgage. I believe fixed-rate loans are the best choice for residential buyers unless you are only planning to be in the property for a couple of years, then an adjustable-rate or interest-only mortgage might be better.  The 30-year has a lower monthly payment. The 15 year has a lower interest rate. According to Michael Abram of RPM Mortgage, there is about a 1/2% difference in the mortgage rates between the 15 and 30. I recommend 30 years fixed over 15 years fixed for my first-time home buyers, because they are stretching to get into a home, especially in an expensive city like Los Angeles where the median home price is hovering around 700K, and the lower monthly payment gives them more room if they go through a rough patch.

Most buyers choose the 30-year fixed-rate mortgage for the lower monthly payment. If you are feeling comfortable in your financial situation there is nothing that says you can’t pay off your loan early. Unlike commercial loans which often times have prepayment penalties residential loans seldom have prepayment penalties- you might want to check to be sure if you are worried about it but I have never come across it personally.

If you want to pay off your loan early, I recommend going the making extra payments route rather than refinancing because every time you refinance you incur fees and you reset the clock on interest amortization. The only exception to this is if interest rates have gone way down- then the only thing that matters is the lower rate.

Back in the day, it was very complicated to figure out how to turn your 30-year note into a 15-year note. You had to take your pencil and scratch paper and getting really confused. Not the case today with modern online mortgage calculators ! Thank heavens for the internet.

Let’s take a quick look at a 30-year and 15-year comparison. This scenario is a $650,000 purchase price 150K down and a 3.4% interest rate on the 15 yr and 4.1% on the 30 yr. 

As you can see, there is almost a $1,000/mo.! difference between the 15 year and 30 year.  Turning your 30 year into a 15 isn’t cheap. In this scenario, it was an extra ~$24,000 each year to make the change. The good news is if you don’t have all of that money, you can pay whatever extra amount you are comfortable with as the extra payments are entirely optional.   

The rule of thumb for calculating turning your 30 yr into a 15 is 2.5(x) your current monthly mortgage payment each year as an extra payment

Want to run your own scenario?  Check out Nerdwallet’s 30-year and 15-year mortgage calculator

Any extra payment you make goes 100% towards the principal and speeds up your loan repayment timetable. If you fall short of the 2.5 each year or skip a few years, it might turn the 30 year into a 15 year, but each contribution speeds you up each year. 1 monthly extra payment each year turns a 30 year into a 25, and  2 extra payments each year makes it a 23. 

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