Extended Mortgage Interest Rate Locks are a hot topic, Especially if the buyer is waiting for a new home to be finished. Many families who started new home construction last fall are still waiting for their builder to nail down a completion date. It could be 90 to 150 days until the house is ready depending on labor shortages, appliance shortages, flooring and cabinet delivery issues etc. What are your options? Does the cost of an extended mortgage interest rate lock make sense compared to how much interest rates could climb as you wait for your home to be completed?
In general you have two options to extend your mortgage interest rate lock; upfront extension commitment fees which can be either refundable or nonrefundable, or normal 60 or 90 day rate locks with additional extension fees paid “as you go”. I am generally opposed to paying large upfront fees so this discussion will focus on normal rate lock extension fees.
To calculate whether a mortgage interest-rate lock extension makes sense for you, the math is pretty straightforward. Calculate your monthly payment based on current interest rates for a 60 or 90 day rate lock Then calculate your monthly payment based on a much higher rate, say 1% higher than todays 60 or 90 day price. Now that you know your current and potential future payment, calculate the difference on a monthly basis. For the sake of argument let’s assume that your payment would increase $300 if the rate increases 1% while you wait for your house to be completed. This is your DENOMINATOR.
Now calculate the cost of an extended interest-rate lock. I looked at one yesterday and the cost for an additional 90 days added to a 60 day lock was almost 1% of the loan amount. For instance, if you’re borrowing $400,000, an additional 90 days lock extension added to your rate lock would cost you approximately $4,000. The cost of an extension is your NUMERATOR.
Now divide the numerator by the denominator; $4,000 / $300 = 13.33. That means that by protecting your interest-rate lock with an extension fee of $4,000 you save yourself $300 per month. And 13 months after you have closed escrow, you have saved back the cost of having protected your interest-rate with the rate lock extension fee. Thus, over the first 10 years you live in your house, having paid this extension fee will save you $32,000+. In this example, paying for the rate lock extension protection would definitely make sense. However, if the breakeven point is five or six years, then paying the extension fee might not make sense.
I’m happy to review your situation with you and help you make these calculations for your particular circumstance. Send me a message and I’m happy to help you run the numbers.