Mortgage Lock

Most of us realize a higher interest rate means a higher monthly payment on a mortgage. That's why everyone scrambled to take advantage of the low, low interest rates available over the past few months. If you missed out, there is still time. But, if you don't get what's called a "lock" on your rate, you may end up with something much higher than what's now available.

Locking In

An interest rate lock is a contract between a lender and a borrower where the lender promises a specified interest rate.

The terms vary by lender to lender and state to state. A lock may not cost you a penny. Some lenders will lock you in as a way to guarantee your business. Other lenders will charge a couple hundred dollars to lock you into a low rate. The length of the lock is typically 30 to 60 days, but some lenders offer longer locks. You may even be able to extend your lock for a small fee.

Ask for a ‘Floatdown Provision'. The floatdown will allow you to lock into a lower rate if one becomes available. If the interest rate goes up, the lock will protect you from having to pay the higher rate.

Bright Idea!

Get your lock in writing. If you don't have written documentation, you can't be certain you'll get the rate you were promised. Also, be sure you shop around. Experts recommend talking with three lenders to compare rates. The first rate you are quoted is not always the lowest rate you'll find.

If the rate you are quoted still isn't low enough for your needs, you might want to consider a loan for an ARM, or adjustable rate mortgage.

What is an ARM?

If you've ever had a mortgage before, chances are you had a fixed-rate mortgage. This is when the interest rate stays the same during the life of a loan. But, with an ARM, you are locked in, for a certain period of time only, depending in the type of ARM you choose. After the interval you've chosen is up, your rate will adjust based on the index. As the index goes up and down, so will your mortgage payments.

Lenders generally charge lower initial interest rates for ARMs than for fixed rate mortgages. This makes the monthly payment easier on your budget at first. It also usually means that you can qualify for a larger home since lenders generally make their decision based on your first year's payments.

However, you have to remember that the low interest rate can, and probably will, change over the life of the loan. That's the risk of an ARM.

What to Consider

Here are some things the Federal Reserve Board suggests you consider before taking out an ARM:

>>Is your income likely to rise enough to cover higher mortgage payments if the rate goes up?

>>Will you be taking on any other sizable debts in the future? Will you be buying a new car or sending a kid off to college in the near future?

>>How long do you plan to own the home? If you plan to sell soon, rising interest rates may not pose a problem. But, if you plan to stay in the house for a long time, chances are, those rates will be a factor.

Reducing Risk

If you plan to take out an ARM, you are automatically given some protection against rising interest rates with something called a cap. It's the maximum the interest rate can go up. There are two types of caps. So, it's important to find out what's included in your deal:

>>Periodic caps limit the interest-rate increase from one adjustment period to the next.

>>Overall caps limit the interest-rate increase over the life of the loan.

Change of Heart

What happens if you get an ARM and you change your mind or want to pay it off early? It's important to consider these two features before you sign on the dotted line.

Prepayment

Some agreements may require you to pay fees if you want to pay off your loan early. If you think you may want to do this, you may want to negotiate in advance for no penalty or as low a penalty as possible.

Conversion

What happens if you want to change your mortgage from an ARM to a fixed-rate mortgage midway through the deal? Is your agreement convertible? Most contain clauses that let you convert at designated times. When this happens, the new rate is generally set at the current market rate for fixed-rate mortgages.

Bright Idea!

Are you a candidate for a fixed-rate mortgage or an ARM? We've included this tool to help you get some idea about which option may be right for you.

Read more smart consumer tips and strategies
from Fox11 Eyewitness News Online

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