Most choose rate locks
over discount points
Home builders and their
customers -- the ones who wait months for construction to be completed -- crave
the same thing: certainty. That explains the appeal of long-term rate locks.
Uncertainty reigns over the home-construction process.
Builder and buyer seldom know for sure when the house will be finished,
and the final cost often is in doubt until late. And both sides
worry about the impending storm clouds of rising interest rates,
which can rain on the home-financing process.
It's no surprise that
both sides shelter themselves from rising rates by making long-term rate locks.
These rate caps are pushed by builders and embraced by buyers. But there's a riskier
alternative: eschewing a rate lock and spending the money instead to get a lower
rate. It's riskier because no one can predict if or when rates will skyrocket.
impossible to tell which is going to be the best option for the borrower unless
you're looking backwards," says Mark Dallal, vice president of secondary
marketing for Homebuilders Financial Network, which operates in-house mortgage
brokerages for home builders.
When choosing between a rate
lock and discount points, borrowers don't have the benefit of hindsight.
rate lock is the lender's promise that the mortgage's interest won't exceed a
certain rate if the loan is closed by a deadline. For example, if you lock the
rate at 6 percent 14 days before closing, and rates rise over the next two weeks,
your loan's rate is 6 percent if you close on time. Meanwhile, someone who didn't
lock -- who floated, in industry parlance -- would pay the higher rate.
lender handles rate locks differently. Most don't charge a fee to lock a rate
within 30 days of the scheduled closing. Fees are common when the lock is beyond
30 days, and especially when it is beyond 60 days. The fees vary, and some lenders
will refund all or part of the rate lock fee at closing.
are like shaggy-haired car mechanics: long locks usually are covered by caps.
If today's rate is 6 percent, a 180-day lock might cap the maximum rate at 6.5
percent instead of today's rate. A lot of long-term lock programs have a float-down
option, which allows the borrower to seize and lock a lower rate shortly before
closing if rates have dropped in the meantime.
Discount fees are more straightforward. The fees usually
are expressed as points, where one point equals 1 percent of the
loan amount. When you pay a discount point, the lender lowers the
rate. The amount of the discount varies with the tides of the mortgage
market, but one point usually lowers the interest rate by one-eighth
to three-eighths of a percentage point. On purchase mortgages, discount
points are deductible from federal income taxes. Rate lock fees
are not tax-deductible.