‘Rate locks’ look more appealing after recent surge in loan costs
Smart homebuyers are scrambling to lock in their mortgage rates after a sharp increase in late June and new uncertainties looming in the months ahead.
Q. We are in the process of buying a house. The bank that we chose to finance the $160,000 loan we need has offered a “rate-lock plan” that would guarantee that the rate we were quoted when we first applied for the loan cannot rise before the sale is completed. The plan would allow us to get an even lower rate if rates drop before our Aug. 1 closing date. The guarantee would cost $200. Is it worth it?
A. Until recently, I would have said “no.” But the recent volatility in mortgage rates — they surged one-half of a percentage point in late June, to their highest level since July 2011 — makes getting a firm “rate lock” more important today than it has been in several years.
It may seem unfair, but banks and mortgage brokers generally aren’t required to provide a loan at the rate and other terms that borrowers are first offered when they file an application. Until you have a formal “commitment letter” from the bank, which can take several days or even weeks to receive, your rate can be increased substantially.
Some lenders offer rate locks for free, or will waive the cost if the applicant is savvy enough to ask. But even if you must pay the $200 fee, consider it a relatively inexpensive “insurance policy” against another rise in rates before your sale closes.
Average rates on 30-year fixed mortgages stood at about 4.4 percent near the end of June, according to online real estate database Zillow.com. That was up one-half of 1 percent from the previous week and one full point since May, a rise blamed on economic uncertainty about the future.
Another half-point increase, to 4.9 percent, would add $45 a month to the cost of a $150,000 loan and would increase the overall finance charges over the course of 30 years by $16,181. Paying $200 for the rate lock now would protect you if rates continue to climb before your scheduled Aug. 1 closing date and, according to your letter, also would allow you to get a lower rate if mortgage rates go back down.
No one wants to increase their closing costs by $200. But in your case, as with many other buyers in today’s volatile mortgage market, paying for a rate lock would be a wise “investment.”
Q. My husband and I remodeled our kitchen ourselves, but we went a little overboard and wound up exceeding the limit on one of our credit cards by about $1,500 to buy materials and supplies. Will this negatively affect our credit score?
A. The temporary overage will have little or no impact on your score if it was a one-time event and you quickly make a payment to get back under the card’s preset cap. But your score definitely will suffer if you have routinely exceeded the card’s limit or you don’t get back under it soon.
A lower score would prevent you from getting the best rate the next time you apply for a home loan or other credit, because lenders charge more to applicants who are already laden with debt.
Q. I have a new loan and have to pay $93 per month for a private mortgage-insurance policy. Are these payments tax-deductible, just like the interest payments on my mortgage?
A. Yes, they are deductible — for now, at least.
Most lenders require borrowers to buy private mortgage insurance, or “PMI,” if the down payment on the home doesn’t equal at least 20 percent of the property’s purchase price. The policy will reimburse the bank for some or all of its losses if the loan turns sour and the home can’t be sold for enough cash to pay off the outstanding balance.
PMI payments are tax-deductible, but only if the loan was issued on or after Jan. 1, 2007. The write-offs are slowly phased out for single tax-filers whose adjusted gross income tops $50,000 and for married joint filers who earn a total of $100,000 or more.
This important tax break will expire next year unless it’s extended by Congress. Talk to a tax expert for more details. Also get a free copy of IRS Publication 936, Home Mortgage Interest Deduction, by calling the agency at (800) 829-3676 or by downloading it from www.irs.gov.
Real estate trivia: On average, homeowners pay up to $875 each year for the food, medical and other expenses of caring for a dog. It’s $670 for a cat, a survey by the Connecticut-based American Pet Products Association says; also, roughly $200 for a bird that’s caged and $88 for fish in a standard-size tank.
Ÿ For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.
© 2013, Cowles Syndicate Inc.