Interest rates can change on a daily basis. Some days interest rates go up. Some days interest rates go down. And some days interest rates stay the same. So how are you to know when the best time to lock the interest rate on your loan really is? Unfortunately, there is not a scientific answer to this question, but there are some indicators that you can review to decide when it may be the best time to lock your interest rate.

Mortgage Lender Policy

You should talk with your mortgage lender to find out what their interest rate lock policy is. Usually there is a lock-in fee associated with locking your interest rate. Since this is an upfront and usually non-refundable charge, it is not something that you want to do on a whim. Lock-in rates can be a couple of a hundred dollars or a percentage of your mortgage amount so the price to pay is high. This fee is often times credit toward your closing costs but they will usually not refund the fee outright to you for any reason.

The typical mortgage lender will allow your interest rate to float until 1 week prior to your closing date. If interest rates are expected to remain constant then there may not be a need to pay the upfront lock-in fee. Even if the rate changes by ¼ of a percent, the effect on your mortgage payment will only be a few dollars. So is it really worth it to pay hundreds of dollars for that assurance? The answer is probably not.

On the other hand if interest rates are expected to drastically change in the time period before your automatic interest rate lock occurs, then it may be beneficial to lock-in to the interest rate right away.

Interest Rate Environment

The interest rate environment is the most important thing to consider when you are trying to decide when is the most appropriate time for you to lock your interest rate. If interest rates are expected to drop (maybe the Federal Reserve has hinted about dropping the rates), then the last thing that you want to do is lock-in your interest rate to find out that two weeks later the current interest rate is lower. Most lenders’ lock-in policies do not allow you to get out of your rate lock in a situation like this to obtain the lower interest rate, so you are stuck with the higher rate that you locked previously.

Since the time-frame between you buying a home and closing on the mortgage is usually 30 days or so, and since the interest rate environment of late has not had drastic swings in the interest rate changes, the likelihood of the interest rate jumping on you too much has been slim. If we were in an interest rate environment where there are big jumps in the interest rate then it may be beneficial to lock-in your interest rate at the point where you feel, and economic indicators have suggested, that the interest rates are at their lowest point.

There are many factors that are taken into consideration when you are trying to get approved for a loan or mortgage. Your credit score or rating can be one of the most important factors that lenders consider when you are trying to qualify for a mortgage or other type of loan. Negative items on your credit report can cause your credit score to deteriorate and lower credit scores can cause you to pay a higher interest rate or to get turned down for the loan completely. Whether or not you think you have bad credit, you should take these steps before applying for any loans to be sure that everything is correct when it comes to your credit report.

Step 1. The first thing that you should do before you apply for a loan or mortgage is to request and obtain a credit report from each of the three credit agencies (www.transunion.com, www.experian.com and www.equifax.com ).

Step 2. When you receive each of the three credit reports, review each report separately and mark anything on the reports that are negative, incorrect, or items that you do not recognize as yours.

Step 3. Once you have identified all of these incorrect items write a letter to each of the credit agencies disputing the negative, incorrect or unrecognizable items that are showing on your credit report. Give a complete explanation as to why these items are incorrect or not yours.

Step 4. If there are items on your credit report that are your items (such as late payments or unpaid items), then contact the creditors and collection agencies that are handling your bad debt to make payoff and/or payment arrangements. Negotiating and making payment arrangements with creditors and/or collection agencies and carrying through with these arrangements will remove these blemishes from your credit reports and help to improve your credit score and credit rating.

Step 5. Once the blemishes and bad credit have been removed from your credit reports, the credit agencies will send you a new credit report which will show the corrected or deleted items, your new credit score, etc.

After you have your credit fixed you will be able to apply for mortgages and loans and receive better credit terms. Borrowers with good credit tend to receive lower interest rates and more favorable loan terms. This is why it is very important to stay on top of your credit score and credit report, checking it on a regular basis for incorrect items or items that are not yours.

Adjustable rate mortgages (ARMs) are not the appropriate type of mortgages for everyone, but they do have advantages that can be beneficial to borrowers. Traditionally, adjustable rate mortgages have interest rates that are lower than fixed rate mortgages. Depending on how often the interest rate adjusts and what interest rates are expected to do (go up or go down), ARMs can cost a borrower a lot less in the long-run.

So before you decide to obtain an adjustable rate mortgage consider these 3 tips to decide whether or not an ARM is the right type of mortgage for you.

Tip #1: One factor that you should consider when thinking about going with an ARM is how long you intend to own the home or how long you intend to have the mortgage. The average for Americans is that we move or refinance every 5 to 7 years. So, for example, if you only intend on owning the home for 3 years and you can get a lower interest rate using a 3/1 ARM, then is there really a need to have a 30 year fixed rate mortgage with a higher interest rate? The answer is probably not. And the fact that we almost never live in our home for 30 years anymore also means that we usually do not need a 30 year mortgage because we intend on actually owning the home for that long.

Tip #2: You also need to consider your ability to deal with possible adjustments in your monthly mortgage payment. If your interest rate adjusts up by a quarter of a percent how will this affect your monthly payment? Can you afford this higher payment amount? Being able to financially deal with fluctuations in payment will determine whether or not an ARM is a possible mortgage for you.

Tip #3: Another great time to consider getting an adjustable rate mortgage is when interest rates are expected to drop or go down during the time that you will have the mortgage. For example, Mr. and Mrs. Homebuyer are buying a new home with an adjustable rate mortgage that adjusts every 6 months because they expect the interest rates to drop in the next year or so. It can be a gamble because interest rates can go up and interest rates can go down, but if you are emotionally and financially able to handle the possible fluctuations then it can really pay off in the long-run by saving you money in interest.

While an adjustable rate mortgage is not right for everyone, it may be right for you. It is important that you take all factors into consideration before obtaining any type of mortgage. You should weigh the pros and cons for each mortgage options and then decide which type of mortgage makes the most sense for you and your personal situation.

If you are shopping for a mortgage or have ever shopped for a mortgage you have probably heard the term “buying down a mortgage” or “buying down the interest rate.” And you probably asked yourself, what in the world does this mean? Luckily, it isn’t really as complicated as it may first seem. It is important, however, to understand exactly what it means and how it may financially impact you.

Buying Down a Mortgage
So when you talk to your mortgage lender they are going to quote you an interest rate and you are probably going to hear them say something along the lines of, “On a 30 year fixed the interest rate today is 6.25 percent with a 1 point origination fee and an APR of 6.5 percent.” They may go on to say, “Paying 2 points, which is a 1 point origination fee and buying down your mortgage by paying another 1 point, your interest rate would be 6.125 percent with an APR of 6.375 percent.”

While this may sound like mumbo jumbo to you it really just requires that you take a step back and break down what they are saying into segments that you can understand. One point of a mortgage is equal to 1 percent of the mortgage amount. So in the first scenario you are paying 1 percent of your mortgage amount to get a rate of 6.25 percent. In the second statement you are still paying the 1 percent origination fee and you are also buying an additional 1 percent of your mortgage amount to “buy down” the interest rate on your mortgage by 1/8 of a percent.

Example: Sally and Joe Buyer are purchasing a home for $150,000 and would like a mortgage for $100,000. Using the statements above, Sally and Joe Buyer would be paying $1,000 in points to obtain the 6.25 percent rate. They would be paying $2,000 in points to buy down the rate to 6.125 percent.

Should You Do It?

So is it wise to buy down your mortgage? It really comes down to several factors:
1.Your personal financial situation: Do you have enough money in savings to cover your cash down payment, closing costs, and points.
2.How much of a savings are you are going to enjoy by buying down the rate? How much money are you really going to save each month in your mortgage payment by paying more in points upfront?
3.What is your break-even point? How long is it going to take you to recoup the additional amount of money that you have pay upfront to buy down your mortgage?
4.Will you have the mortgage long enough to recoup this additional cost?

Example: Using Joe and Sally as an example again, let’s say that Joe and Sally think that they are only going to live in the home for 2 years because after that they are going to start a family and this home isn’t big enough for them to grow into.

Paying 1 point, Sally and Joe’s monthly principal and interest mortgage payment will be $615.72. By paying 1 additional point Sally and Joe’s monthly principal and interest payment will be $607.61. This means that it is costing Sally and Joe an additional $1,000 (1 point buy down) to save $8.11 per month on their mortgage payment.

To figure out their break-even point you would divide the additional cost of $1,000 by the savings per month of $8.11. The answer is the total amount of months that it will take Sally and Joe to break-even, which in this case is 123.3 months or 10.28 years.

Since Sally and Joe only intend on having the home for about 2 years they will not recoup the additional $1,000 prior to them leaving the home. In this particular situation it is not beneficial for Sally and Joe to buy down their mortgage.

Since each situation is different it is important to evaluate your own personal scenario before deciding whether or not it is beneficial to buy down your mortgage. You can also ask your lender to help you conduct a break-even analysis to determine the best option for you.

Buying a home is not just about having the cash for the down payment and being able to afford the monthly mortgage payments. There are other costs involved when setting up mortgage financing for the purchase of a home. These costs and fees are usually referred to as closing costs. It is important that mortgage borrowers understand what the costs involved in obtaining a mortgage really are and what they mean.

Buyer’s Estimate of Closing Costs

You will be required to bring a cashier’s check with you to closing to pay for your closing costs. These costs include any balance required for your down payment, charges and fees from your mortgage lender, the title company and government recording fees. When you apply for your mortgage, your mortgage lender will provide you with a Good Faith Estimate (GFE) of your closing costs, which should include the mortgage lender fees, the title company fees and recording fees. Please keep in mind that this is just an estimate of your closing costs and that the actual amount of closing costs required will not be known until 24-48 hours prior to the day of your closing.

You will find a worksheet below that will help you to estimate the closing costs for the purchase of your home. You will find an explanation of each section of the estimate worksheet below as well.

Mortgage Lender’s Fees

Points – Each point is worth 1% of the loan amount. Points are also known as discount or origination points/fees. For example, on a $100,000 loan, 1 point is equal to $1,000.

Document Preparation Fee – This is a fee that the mortgage lender charges to prepare the documents that you will sign at closing.

Tax Service Fee - This is a fee charged by the mortgage lender for establishing or retaining a tax paying service.

Private Mortgage Insurance (PMI) – This is generally charged by the mortgage lender when the down payment is less than 20% of the purchase price of the home.

Mortgage Insurance Premium (MIP) – This is a fee that is generally charged on FHA loans, paid as a one-time premium up front, plus monthly payments for the term of the loan. Please note: Not all mortgage lenders charge all of these fees on every loan and some mortgage lenders charge other fees not listed here. Therefore, you should contact your mortgage lender for more specific details on the fees that they charge for your particular loan.

Escrows

Escrow is money that is held in an account in order to pay for future bills, such as hazard insurance, private mortgage insurance and property taxes. In order to calculate the monthly charge for fees of this nature, divide the total amount by 12. The closing cost estimate worksheet lists the number of months that mortgage lenders typically require that you keep in escrow in order to cover the payment of these bills.

Closing/Settlement Fee – This fee is paid to the title company for the preparation of documents, examining the title abstract, conducting the closing, coordinating with the mortgage lender and all of the other parties in the transaction, disbursing funds, recording documents, procuring and recording releases of existing liens, issuing title insurance policies, and any other services that the title company provides to the borrower.

Title Abstract/Examination - This is a fee paid to search the public land records in order to verify ownership of the property. The title examination shows the loans and liens that must be satisfied from the Seller’s proceeds at closing.

Title Insurance Premium– The amount that is paid for title insurance coverage is based on the mortgage loan amount and the purchase price, as determined by rates filed with each jurisdiction insurance commission.

Delivery Fee– Mortgage lenders require that their loan documents be delivered by a courier or sent overnight delivery to and from the mortgage lender and the courthouse for recording. This is the fee for these deliveries.

Governmental Recording Charges

State and County Recording Fees – State and local governments charge transfer and/or recording fees when you purchase a home. These can vary from state to state and in certain states, like Florida, these fees are often referred to as “doc stamps.”

Other Costs

Survey – Fee for the house survey that shows the approximate location of the improvements within the boundaries of the property.

Homeowner’s Association or Condominium Association Fees – This fee only applies to housing developments that have associations. The fee listed here is usually for the next month’s payment. You will reimburse the Seller for any portion previously paid by them.

Property Taxes – The Buyer is responsible for reimbursing the Seller for any prepaid taxes. The Buyer is also responsible for establishing an escrow account for the payment of future tax bills by the mortgage lender.

If you would like to download a printable Excel worksheet, Microsoft Office has a template that you can download at
http://office.microsoft.com/en-us/templates/TC010566191033.aspx

Buyer’s Closing Cost Worksheet
1. Balance of Down Payment (Purchase price – loan amount – earnest money deposit)
2. Mortgage Lender Fees
(You should call your mortgage lender for a quote)
a. Origination Fee ___________
b. Discount Points (if applicable) ___________
c. Document Preparation Fee ___________
d. Tax Service Fee ___________
e. First Year PMI (or FHA or MIP) ___________
f. Other Fees ___________

3.Escrows
(Annual rate divided by 12 months)
Homeowner’s Insurance ___________
PMI (2 months) ___________
Real Estate Tax ___________

4.Settlement Fees
(Call your title company or mortgage lender for an estimate)
Closing Services ___________
Title Search and Examination ___________
Title Insurance Premium ___________
Miscellaneous Fees ___________

5. Governmental Fees
Recording Fees ___________
Florida Mortgage Tax ___________

6. Other Costs
Survey ___________
Homeowner’s/Condo Association Fees ___________
Miscellaneous ___________

Total Estimated Charges

Please keep in mind that the figure reflected here is just an estimate. Please call your title company or your mortgage lender to verify the amount that you will be required to bring to the closing.

The real estate market is similar to the stock market in the fact that prices on real estate fluctuate. This fluctuation is based on several different factors like supply, demand, the interest rate environment, and the location of the real estate. These, of course, are just some of the factors that determine the state of the real estate market, but they are important indicators of what is happening in the real estate market where you live or where you are planning to buy.

In recent years interest rates have been low, which has sparked an increase in home buying. As interest rates drop, home purchases and refinances usually increase. On the other hand, because of a housing shortage felt in many areas of the country home prices have also increased. This increase in home prices has slowed down the home buying numbers because higher prices knock many buyers out of the market for financial reasons.

So, in a real estate environment where prices are high and rates are low what should buyers do when it comes to obtaining mortgage financing?

Here is where some of the good news comes in. The picture painted above may seem bleak for some, but there is a light at the end of the tunnel.

Adjustable Rate Mortgages

Upside: Adjustable rate mortgages typically have lower interest rates than fixed rate mortgages. Since the interest rate is lower, and the payment is figured using a 30 year amortization, the monthly mortgage payment on adjustable rate mortgages, are usually lower as well. During a low interest rate environment getting into an adjustable rate mortgage will allow you to spend less money on your mortgage and allow you to be able to afford the higher mortgage amount that will be incurred because of higher housing prices.

Downside: Obviously, the interest rate is subject to change, but there are caps on adjustable rate mortgages that limit the amount that the rate can change. And in the interest rate environment of today rates seems to change in small increments, which will usually fluctuate your payment in small increments as well.

Interest Only Mortgages

Upside: The invention of interest only mortgages have allowed buyers to be able to afford to buy a more expensive house than they would normally be able to afford. Since the monthly mortgage payments on these mortgages require only interest, no principal payments are required. Even on a principal and interest fixed rate mortgage, very little of the monthly mortgage payment is being applied to the principal anyway. Since interest only mortgages usually carry a lower interest rate than a fixed rate mortgage, it is a win-win situation because the monthly payment will be lower based on the lower interest rate and the fact that only interest is required to be paid. In the times of today, where US residents move every 5 to 7 years, it is not necessary to make principal payments, because even on a 30 year mortgage where principal portions are required, very little will have paid down on your principal balance in the 5 to 7 year period anyway.

Downside: There are not any automatic principal reductions on this type of mortgage, but principal payments are allowed. You just have to be disciplined in making principal reductions if that is your goal.

Fixed-to-Adjustable Rate Mortgages

Fixed-to-adjustable rate mortgages are another type of mortgage that can help you to lock-in your interest rate for a fixed period (usually 1, 3, 5, 7, or 10 years). In an interest rate environment where rates are low you may want to lock-in your interest rate to insure that the rate will not fluctuate if and when interest rates go back up.

Upside: Lock-in your interest rate at a low interest rate and you do not have to worry about the interest rate going up for that fixed period.

Downside: If you keep the mortgage after the fixed rate period then your interest rate is subject to change.

Establishing a mortgage to purchase or refinance a home can be a very confusing jumble of numbers if you are not sure what the numbers being thrown at you actually mean. Since 90 percent of homes purchased in the United States are purchased using some kind of mortgage financing it is important to understand mortgages, how they work, and what your options are when establishing a mortgage of any kind. Since there are a variety of mortgage financing options available, which type of mortgage you have will directly relate to how you assess how much you are paying in mortgage interest. The good news is that the interest portion of your mortgage is generally fully tax deductible, so understanding the interest portion of your mortgage will also help you to figure out how much you may be able to write off on your tax returns.

Fully Amortized Mortgages

Fully amortized mortgages, usually 15- and 30-year fixed rate mortgages, require that a principal and interest payment is made each month. There are several ways to determine what your monthly mortgage payment will be, how much of this payment is the interest portion, and how much of the payment is actually being applied to the principal of your mortgage. There are an abundance of helpful mortgage calculators online that will help you calculate the interest that you are paying each month on your mortgage. Some calculators will also calculate the total amount of interest that you will have paid by the time that your mortgage is paid off. One specific calculator that will help you run a payment schedule can be found on the Fannie Mae website

Interest Only Mortgages

Another type of mortgage available to borrowers is the interest only mortgage. This type of loan product is not fully amortized. It requires a minimum payment each month that consists solely of interest. This makes it very easy to calculate the interest portion of your monthly mortgage payment because it is a simple interest calculation.

1. Multiply the mortgage balance by your mortgage rate.
2. Divide this number by 12 (the amount of payments or months that there are in a year)
3. This is your monthly interest payment

Mortgage Advisor

If you are not the do-it-yourself type mortgage shopper, then you can also contact your local mortgage lender to speak with a mortgage advisor. Your mortgage advisor will give you advice on the mortgage options that are best for you based on your personal financial situation. The mortgage advisor will also be able to run amortization schedules that detail out how much you are paying in mortgage interest each month, and how much interest you will pay over the life of the loan.