Essential Components of the Mortgage: Points and Lock-in Rates

As previously explained, APRs may not prove to the most effective tool for measuring mortgage plans. Thus, in one’s confusion as to the manner in which to go about comparing similar plans, it is best to first gain an understanding of what the mortgage package entails and then go step by step to determine which plan offers the optimal options for your situation.

Initially, it is suggested that one be mindful of the fact that mortgage loans are comprised of more than just interest rates. In addition, they also encompass rates quotes, points and costs associated with the closing.

To clarify, points (one percent of the total amount loaned) are defined as being up-front fees remitted to the lending institution at time of the closing. Points are assessed to either increase or decrease the overall rate of the loan. For the most part, lending institutions will permit the borrower to select from a range of point and rate combinations. Thus, when evaluating several plans comprised of similar tenets, it is also important to consider any associated points or fees.

Under the umbrella of closing costs, there are such affiliated costs as: processing fees, title charges, escrow assessments, transfer expenses and government rates. All of these ancillary costs can add anywhere from hundreds to thousands of dollars to the loan’s overall cost.
When assessing the plan offered by one lender with another, it is essential to also take into account the additional fees lenders may add for their time and energies. Such fees, which amounts are set at the sole discretion of the lender, can include: processing and administrative costs.

When evaluating plans offered by varying lenders, one must extensively review all components of the loans from required payments, credit necessities, qualifying ratios and available options such as: conversion possibility, penalties for paying early.

Is it also crucial that you consider the lock-in term for each plan. The lock-in term refers to the period in which you will be eligible for the stated rate of interest and promised points. Generally speaking, the most frequent lock-in term periods are those of 30, 45 and 60 days. Yet, bear in mind, the longer the lock-in term, the greater the cost for the loan. As a rule of thumb, the lock-in term should cover a time that allows you to sufficiently settle in to one’s home.
And remember to assess interest rates on the same day as they are quite volatile and can change within a day or even hour’s notice.

In short, it is advised that when evaluating loans from a range of lenders that you review similar plans, i.e. 30-year plans with 30-years plans and ensure all plans contain like-minded features.