The One-Day Change To Your Closing Date That Will Save You Money

A mortgage rates is born from the price of mortgage bonds and nothing else -- not the Fed Funds Rate, not the 10-year treasury note, and nothing else, either. 

But mortgage rate pricing doesn't end there; from the price of mortgage bonds, all we get is the "base mortgage rate". 

The rates themselves are subject to additional adjustments based on the loan's inherent risk factors.

Some of these risk-based adjustments are well-known:

• Occupancy Type: Primary residences have fewer adjustments than investment homes
• Credit Score: High credit scores have fewer adjustments than low scores
• Equity Position: High equity levels have fewer adjustments than low equity levels

Others, however, are not.  And it's the lesser-known adjustments that push home buyers into big, costly mortgage planning mistakes. Big. Huge.

The most ignored interest rate adjustment turns out to be a fairly easy one to manage -- it's the mortgage rate lock commitment period.

A mortgage lender's rate lock commitment is the bank's promise to deliver a specified mortgage rate to a specified buyer for a specified period of time. 

It's a contract, of sorts, in which the lender says: "I promise to honor this interest rate for the next x days."  Mortgage rate lock commitments are based in 15-day increments. 

The most common rate lock commitment period are:

• 15-day rate lock commitment
• 30-day rate lock commitment
• 45-day rate lock commitment
• 60-day rate lock commitment

So, when a mortgage lender issues a 30-day rate lock at 6.000%, it is promising to lend at 6.000% at any time within the 30-day widnow into the future.

Now, there's a key inference to be made from that.  Because rate lock commitments correlate to some point in the future, they are really just predictions about where the mortgage market will be x days from now.

Predicting the future is a dangerous game and banks know that the farther into the future they try to predict, the less likely their predictions will be correct. 

This is why longer rate lock commitments tend carry higher interest rates, higher fees, or both -- banks are hedging against the risk of time.

Home buyers that understand how rate lock commitments work can better manage their closing dates to save money in the short- and long-term. 

Assuming a $300,000 home loan on a bank-amortizing loan (i.e. 30-year fixed), look at how various rate lock commitments change the monthly mortgage payment:

• 15-day rate lock: $1,798.65 payment
• 30-day rate lock: $1,822.83 payment
• 45-day rate lock: $1,847.15 payment
• 60-day rate lock: $1,871.61 payment

There is a measurable difference between closing on Day 45 versus Day 46 -- it's $24.46 monthly and $8,805.06 over 30 years. 

Managing mortgage rate lock commitments is an often-neglected methods for keeping mortgage payments down -- mostly because home buyers don't know about it, and loan officers don't talk about it.

Before choosing a closing date for your home purchase, consider the impact of time.  It could lead to significant savings.

(Image courtesy: CNN)