Tuesday, August 9, 2011

Interest Rates 101

After talking with our PM, we realized we are inside of 60 days to closing. I knew from previous conversations with our loan officer that NVR typically locks on 60 day rate locks. They typically recommend locking right around the time of your pre-drywall meeting (and our slab was just poured today) so I wasn't sure if we should lock yet.

I decided to ask our PM for the OK to lock the rate (and in writing) ...in case there are issues with construction delays, we have leverage to try and get Ryan Homes to pay for extension fees to keep our rate locked. So, I left our PM a message at about 1:00pm and by 2:30-3:00pm we had an email from him confirming our preclose meeting for Sep 28 and stating we are good to lock. Thumbs up for the quick response!!

I immediately called our loan officer (as I knew from being a loan officer in the past that the "lock desk" usually closes in the afternoon, not at end of business. If using NVR, I found out it is 3:30pm although sometimes they have a little extra time but its not guaranteed.) We locked our rate today 1/8th percent lower than we were hoping for AND it is paying .25 credit. We are ecstatic!!

If you have questions about locking your interest rate, here are some facts:

1. Most lenders lock at 30, 60, or 90 day locks (60 day lock on 8/9/11 will keep you locked until 10/8/11)
2. If you go past your rate lock, you will either have to pay daily extension fees to keep the rate locked or be charged "worse case pricing" which IS as bad as it sounds so avoid this.
3. Rates go by 1/8th of a percent. ie- 5.00%, 5.125, 5.25, 5.375, 5.5, 5.625, 5.75, 5.875, 6.00
4. When locking your rate, you may receive a credit (money TO you toward closing costs,) pay points (money FROM you to get the rate you want,) or get "par" (no money to or from you.)
5. When you lock a rate, you are locking in pricing for THAT DAY. So, if you lock at 5.5 and later decide you wish you bought the rate down to 5.0, you can still make the change and there should not be a fee for changing (but you will pay the cost to buy it down.) Here is a fake example of a "rate sheet":

4.5................1.25 (you pay 1.25)
5.0.................0.0 (par)
5.125............-0.25 (you receive 0.25)

6. Notice, rate sheets do not always make sense (4.625 and 4.75 cost the same..gee which should I pick.)

7. Well thats great WodyJ, but what does this translate to in $$$?
In this example, 4.5 will cost you 1.25 points (1.25% of your loan amount.) If your loan amount is $200,000 you would calculate:
200,000 x 0.0125 = $2500
Just remember, you move the decimal 2 places left (make the number smaller.)
If you want lower closing costs and willing to have a higher monthly payment, you could get the 5.25 and receive $1500 toward closing cost (200,000 x .0075).

8. A lot of times, par is not available, meaning you have to decide if you'd rather pay points to get a lower rate or take the next rate up that actually pays you a credit.

Other tips:
- Do not ask your loan officer what he/she thinks the rate will be next week. This is like asking your pastor when Jesus is coming. They don't know. If anything, ask them what rates have done in the past two weeks. While this doesn't let you know what the future holds, it gives you an idea of how volatile the rates are (how fast they are moving around.)
- Don't get greedy. While I was a loan officer, I saw a lot of people gamble when trying to decide to lock or float. The losers were always more regretful than the winners were satisfied.

Happy building!


  1. GREAT TIPS!!! So good to have someone knowledgeable out here! =)

    I had heard the closer you lock in to the end of the month, the better too. Is that right? Something about it saving you some $$$. (Not that it helps me anymore since I already closed, but I was wondering since so many others out there may need the information).

    Thanks for sharing hon! Hope all is well!

  2. Excellent Tips! Thanks for the information!

  3. Good question Noey.
    The time of the month does not have an affect on the rate lock (unless there is some statistical analysis; I've never heard of one though.)

    There is something that the time of the month affects, and that is when you CLOSE.
    Short and sweet:
    The closer to the end of the month that you close, the less interest you pay upfront.
    Detailed reason:
    When you make a mortgage payment, you pay interest "in the rears" meaning September 1 payment pays for August's interest. GENERALY, if you close on say 10/15, your first payment will be 12/1. By not making a 11/1 payment you have to pay the interest for 10/15 thru 11/1 at closing (16 days,) whereas, if you closed on 10/28 you would pay only 3 days.

  4. Obviously this is a very old post but... I would love to include a link to it on our blog. It is SO informative!
    It looks like we will pretty much be neighbors -- currently building in the section near the pool!

  5. Feel free to use it and good luck building. Feel free to ask if you have any questions about the neighborhood, etc.