How to Compare Mortgage Rate Lock Offers
by Dan from San Jose, CA
Ask Kate how to compare mortgage rate lock offers: Dan's lender has offered two rate lock options. Lock in a mortgage rate without points. Or lock at a slightly higher rate and receive a $3500 credit toward closing costs.
By the way, the lender insists option two is a good deal which makes Dan wonder if something is fishy.
Ask Kate: Compare Two Offers for Locking In Mortgage Rates By Dan from San Jose, CA
I am in the Escrow process and 3 weeks away from getting the keys. At this point my lender is offering me an option everyday to lock down the interest for the mortgage (30 years fixed) for that day's interest rate as one option.
Or another option is to lock at a higher interest rate, typically 13 points more than that day's interest rate. But the benefit of 2nd option is they are giving me a refund of $3500 that could be used towards closing costs. The lender is not charging any points as well.
Do you think these type of refunds is common in the mortgage area? I am wondering why do they give a free money? Increase in interest rate is yielding $50 approximately more per month. After 6 months, if I refinance I would have paid $300 or $350 more in monthly payments. But I would have gained $3000 approximately due to the refund.
So I was told that this is a good deal. Please let me know your thoughts about this. Regards, Dan
Kate's Answer: Compare Two Offers for Locking In Mortgage Rates
Regardless of what the lender claims, if an offer doesn't fit into the financial plans for your mortgage, it is not a good deal. Even so, this doesn't necessarily mean the deal is fishy.
Before I compare the two lock offers, I wanted to point out that I think there was a typo in your letter - I doubt that option two would add 13 points to the going rate. Ouch! Probably more like .3 percent. The fact that the second offer increases your payment by only $50 a month backs up my hunch.
Check out how these rates affect monthly payments. As an example, the monthly principal and interest payment for $300,000 at 3 percent for 30 years is $1,264. At 3.3 percent, the principal and interest payment is $1,313 a month, $49 more. See Home Mortgage Payment Calculator to calculate more monthly payments.
Compare the Lender's Lock OffersOption One - Lower Interest Rate:
Are you quite sure that you'll keep this mortgage for at least 10 years? Then perhaps option one with the lower mortgage rate would benefit you. Compared to option two, the cumulative savings after a decade would be $5880 ($49 x 120 payments.) The longer you keep the mortgage, the further you'll come out ahead.Option Two - Credit to Closing Costs:
Or do you plan on refinancing the mortgage after a few years? Then you might benefit from the credit to closing costs, even though it comes with a higher interest rate and monthly payment. Compared to option one, you will have spent $2940 more in monthly payments after 5 years. But you didn't have to put $3500 of your savings toward the closing costs. This is one way to measure an approximate break-even point.
Read the Fine Print in Your Rate Lock Agreement
Whichever rate lock plan you choose, read the fine print in your mortgage rate lock agreement and other loan disclosures
carefully! Read them more than once. Ask a friend to peruse them with you for another viewpoint.
What Motivates a Bank to Offer Credits to Closing Costs
As to why banks make certain offers... Lenders look for their investor's sweet spot, the particular interest rate that yields the most on a given day. Depending on the yield, they can offer their borrowers a credit to closing costs and still turn a profit.
I wouldn't get too balled up over the bank's motivation. I think it's more important to determine which offer is most beneficial to you and then read the fine print thoroughly!
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