Mortgage Interest Rates | New Homes Market Center

Locking in Mortgage Interest Rates

Interest rates on mortgage loans can change daily, and the lender cannot protect the quoted rate until you lock in an interest rate. The longer period of time you want to secure or lock in your mortgage interest rate, the higher the interest rate is going to be.

For example, let’s say that you have an accepted contract for a house you want to buy. The agreed upon closing date is 60 days from now. You call to get a quote on the mortgage interest rate, and the lender gives you a quote for a loan based on a 15-day lock because they are hoping the mortgage interest rates go down before you close. It will appear to you that this lender has the better or same interest rate than a lender quoting pricing on a 60-day lock. This might lead you to choose the lender with the 15-day rate lock. However, since you did not secure the rate, and possibly did not lock in for the correct time-span, you will pay a higher interest rate should interest rates go up.

The same is true if you are building your new home; you may get excellent quoted rates during the construction period but once you transfer to your permanent financing or your home nears completion the mortgage interest rates might change quite a bit.

Upon contract or once your construction phase is near completion, tell your lender that you are thinking about locking in your mortgage interest rate, and ask for a quote or Good Faith Estimate. If you are satisfied with the quote, then ask your lender to lock in your rate. When they verify that you are locked in, please request a secondary lock confirmation. This is the lock confirmation lenders get from the investor who plans to purchase or underwrite your loan. Your lender may not want to send this to you because it discloses exactly what they are making on your loan. Tell them you understand that it includes the amount they are making, and ask them to black out that information. Assure them that what you are concerned with is getting the agreed upon terms. If they still choose not send you the secondary lock confirmation, find a lender who will.

In addition, some lenders will require payment for lock-in periods. Ask the lender up front if the company charges for locks, and if they require payment for rate locks less than 60 days, you might want to consider another lender.

In summary, consider locking in your interest rate when you have an accepted contract on a house and have an idea of the closing date or completion date. Know your timeline and then think about the lock possibilities. A lender can lock for 15 days to more than nine months, but you will want to discuss the benefits and risks of locking a loan for more than 90 days. The longer the lock, the higher the interest rate; however, if interest rates are rising, a long-term lock may be a good decision.

TIP: Be aware of lenders quoting on a short-term lock-in period, and loans that have pre-payment penalties or negative amortization features. Ask if the loan interest rate quoted has any of these features.

How the Market Determines Mortgage Interest Rates

Interest rates on mortgages closely follow the bond market, more specifically, the FNMA mortgage backed securities. These securities are hard to track, so you may want to watch the ten-year Treasury bond, which, not always, but typically has similar movements. Bonds move in increments of 32nds, and they move every day. As the price, or change, on these bonds go down, the yield and mortgage interest rates go up. Bond prices down; rates up. For example, if the 10-year bond is down 16/32, discount points on a given interest rate will go up one-half a point (fractionally speaking, 16/32 = 1/2). As the changes on these bonds go up, the yield and mortgage interest rates come down. Bond prices up; rates down. For example, if the 10-year bonds are up 8/32, discount points are likely to fall one-quarter of a point.

Here is how it works. Each month the government releases economic indicators on the state of many sectors of the economy, including housing, manufacturing, retail sales, inflation, and unemployment. Prior to the release of the reports, bond traders formed a consensus or forecast for the indicators ready for release, and they have bought or sold bonds to position themselves for the reports. In general, as the economy shows signs of strengthening, and a report is higher than the forecast, bond prices will fall and interest rates will rise. An example of this would be if the unemployment rate dropped below forecasts and retail sales were stronger than expected, mortgage interest rates would likely rise.

As indicators come out weak, or lower-than forecast, bond prices will rise and mortgage interest rates will fall. An example of this would be if forecasts indicated factory production to rise 0.6 percent, and it actually rose 0.2 percent (less than expected). Interest rates might drop. Therefore, in general – but not always – anything that indicates a weakening economy is usually good for mortgage interest rates, and anything that shows an expanding or growing economy is usually bad for mortgage interest rates.

The rates for construction loans are not tied to FNMA Bonds but are usually tied to the prime rate. Construction lenders (Interim Lenders) may quote interest rates for these loans at 1-2% plus prime depending on your credit risk or if the new home is being built for an investor versus a homeowner. Please visit our Build section to find out more about construction lending or if you are ready to begin, you can “apply for your construction loan today”.

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