Lock-in Options for New Construction Contract

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If you are in the process of building a new home (or under contract to purchase a new home which is currently under construction), you need to consider your options to protect and lock-in your interest rate.

Historically low mortgage rates (that is, fixed rate mortgages in the 4’s) may soon be a distant memory.  The Federal Reserves program to purchase mortgage backed-securities is coming to a close at the end of next month — March 2010.  This program which was announced on November 25, 2008 and then extended in March 2009 to purchase $1.25 trillion in agency mortgage-backed securities, has increased the demand for mortgages in the secondary market, pushing mortgage rates down to their lowest point in history.  Do you remember your high school economics class?  If the demand is high, price goes up.  And in the mortgage market, when the price goes UP, interest rates go DOWN.  As the demand goes down (the Feds stepping out at the end of March), prices will likely go down, and interest rates will go up.  Interest rates will go up as the Feds step out of the market, but how quickly and how high rates will move up is a topic open for debate.
 
So practically speaking, what does this mean for homebuyers currently in the process of building a new home? 
 
First, let’s look at an example: 
 
On a $400,000 mortgage, with a 30 year fixed rate mortgage at 4.875%, the principle and interest payment = $2,117 per month (taxes, insurance and private mortgage insurance additional, APR = 5.004).
 
Just for this example, let’s assume that with the Feds stepping out of the market, that mortgage rates will go up to the same level as the average rate for 2006 through 2008 at 6.0%.  At this rate, the principle and interest payment on a $400,000 mortgage = $2,398 per month (taxes, insurance and PMI additional, APR = 6.138).
 
This difference (between 4.875% and 6.0%) amounts to a difference of $281 per month.  This monthly difference translates to a total of $16,860 over five years and $33,720 over 10 years.
 
What can you do to protect yourself?
 
If you are under contract to build and purchase, lenders will allow you to lock-in and protect your mortgage rate as many as 180 days prior to closing.  The interest rate available and/or the cost for this extended rate lock protection varies based on the amount of time needed between the day you would like to lock-in and your closing date (45, 60, 90, 120, 150 and 180 day options are available).  And, just for reference, 120 days from today is June 25, 2010.
 
Continuing the example from above:
 
To lock-in a $400,000 mortgage for 120 days would cost an addition 1.5% discount points at closing = $6,000 (there is NO additional up-front fee to take advantage of the extended lock-in).  Assuming that interest rates did go up to 6.0%, the investment of $6,000 to protect your rate would pay itself back over 21 months.  So, even for a homeowner considering living in their new home for 5 years, taking advantage of the lower interest rate today, could save you as much as $10,000 (5 years savings = $16,860, less the additional $6,000 at closing = $10,860).
For more information and for details about your options to lock-in and protect your interest rate, please call (Georgia properties only).
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One Response to “Lock-in Options for New Construction Contract”

  1. Craig Says:

    great info. Jeffrey, the lock in concept is actually something I didn’t know. Thanks.

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