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March Mortgage tip

Consumers who pay attention to market conditions may keep more money in their pocket
Consumers who pay attention to market conditions may keep more money in their pocket
Photo by Spencer Platt/Getty Images

We have entered the first full week of March and those completing a mortgage transaction should pay attention to this solid tip. Pay attention to your rate lock period. A home is the largest transaction most consumers will complete. A mortgage or some type of instrument is used that allows payments to be spread over time.

Should you be planning a transaction in the next couple of days or started a transaction within the past few days, the time of your lock period could be the difference of money in your pocket or money that you didn’t have to pay, if you simply asked your lender.

Purchases are controlled by close of escrow

Purchase transactions are based on close of escrow dates and that typically is used to gauge your lock period. On the other hand, refinances or those who already own their property and are simply completing a transaction are ripe for this strategy.

This is more important in our current market because while rates have held steady, lender application volume has been down. The result is pipelines of applications moving through the system has shortened and the net benefit for the consumer is quicker closings. For the most part of 2013 and the first two months of 2014, lenders typically offered consumers a 60 day lock. This was practical as well as necessary because in a normal market that is the time it took for major lenders to close.

The question for many might be why take a 60 day lock, when a 30 day lock is achievable?

The impact

The reason this is very important is mortgage money is traded throughout trading days and lenders are compelled to offer competitive rates, since it is something they do not manufacture. Consumers chase the notion of obtaining the lowest possible rates. So, while rates are a function of the market, they are based on being traded in blocks of days (i.e., 12 days, 15 days, 30 days, 45 days, etc.). The shorter the term the less cost to consumers. However, no lender is going to allow consumers to take a short term mortgage, knowing it might expire before the transaction can close, which is why the industry standard was a 60 day lock. If that were to happen they would be required to pay a penalty, especially if rates increased.

Here is a very basic illustration of how this impact can put money in your pocket. A 30 year mortgage based on a 60 day lock can be had for 4.375%. However, mortgage money to consumers typically trade in eighths (.125%), so the same mortgage may be available as much as a quarter (.250) if closing can be completed within 30 days. Using an average mortgage amount of $175,000, the difference in monthly savings using .250% is $25.61, per month. While that may not seem like much, it is a realistic example of squirreling whatever savings you can obtain and keeping in your pocket, versus spending or unnecessarily giving to your lender. Whatever the savings may be this is just one basic strategy consumers often overlook.

Some lenders may balk at offering shorter term mortgages so be prepared to ask what their closing time is, as well as what is required to meet that time-frame? In the arena of competition given the reality of reduced pipelines, lenders are keenly aware that if they do not keep pace with what consumers are seeking, they risk losing business.

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