Lock the Interest Rate

Locking the Interest Rate – First Thing to do in Step 5

This is not an automatic event.  The borrower should be an active participant when it comes to locking in the interest rate. The loan officer should offer more than one rate option. All lenders have multiple options when it comes to interest rates. A typical rate sheet will contain 8 to 10 different rate options for every type of mortgage.

Let’s pretend our rate sheet has 10 options for every loan product.  So there will be 10 different interest rates for the 30 year fixed rate, 10 different rates for the 25 year loan and so forth.  If the lender offers terms in 5 year increments there will be 50 different interest rates just for the conventional fixed rate loans! 

Interest rates are typically quoted in 1/8% increments. 1/8 = .125 and every increment has a quoted price, this gets complicated quickly so bear with me.  Borrowers focus on the rate, lenders focus on the price of the rate, also called a premium.

Example from a Rate Sheet:

 

Sample From Rate Sheet Lock the Interest RateSample 30 Year Rate Sheet

In the example above is a (not recent) screen shot for a 30 year fixed rate, the rates are in the left column and the prices are on the right side.  An interest rate of 3.750% is priced at 99.243 before any adjustments, 100 would represent a full price called “Par” requiring no points or origination fees.

If the price to the borrower to get the interest rate of 3.75% is 99.243 the “points” paid by the borrower is .757 or $757 for a loan amount of $100,000.  In order to get that rate the borrower’s closing cost would increase by $757.

Look at the chart again and notice the 4.000% would have the opposite effect. It would lower the closing cost by $726.70.  That is a swing of almost $1,500!!

There is more information on the how the price of Interest rates are calculated on the page CreditXpert™

It is easy to see the amount of money the borrower will need at the closing can change a lot based on how the interest rate is locked.  If the borrower is not involved in the process of selecting the rate they do not have the option of adjusting the amount of cash they need to bring to the closing.  Get involved!