9 month commitment letter

I'm building a home with a target closing on March 15, 2013, but may close as late as April 15, 2014. I can get a 9 month commitment letter for 3/4 rate point. Is that my best option?

Clarification: Financing $200000 on a $286777 home (new const). Cost of 9 month commitment is 1% nonrefundable upfront fee plus a 3/4% higher rate (compared to online options). The lender's commitment is to lock the rate (at my timing) anytime between today and closing (max of 9 months). There is a float down option that would cost another 1% if the float down option is elected.

Those details help a lot. Pricing is always worse on longer term locks (since lender is assuming the risk that rates will rise during the lock period), but 3/4% to RATE is a very stiff adjustment. The 1% nonrefundable is fairly standard, assume it is credited back at closing (a deposit) rather than just a charge (with no credit back). The economy would have to really ramp up quickly for rates to increase another 3/4% in the next 6-9 months. I am normally pretty lock oriented, but not sure I'd want to pay 1% for the privilege of locking in a 5% (or so) rate now.....

- Ted R. - Oct 11, 2013 at 1:21AM

@Ted Rood Thank you Ted. The lender actually charges 1/4% in rate, but their lending rates run about 1/2% higher day in and day out compared to online rates that I'm finding. The 1% commitment fee is not refunded, and is charged instead of a 1% origination fee. With any lender, I'm planning to go with a 10 year fixed loan, which (at the lender I'm considering) is currently set at 3.5% (0 points), while online lending for 10 year fixed is at 3% (0 points). Again, about 1/2% rate difference. If I were to lock today, under this program, I'd be locking at 3.75% and 1% commitment fee for a 10 year fixed loan. Home 286.8k, 30% down, financing 200k

It sounds like I should wait, confident that rates won't rise by 3/4% before, say Feb 15, and then lock at 45 or 60 days at the then current rate.

- warrenbailey - Oct 11, 2013 at 9:25AM

@warrenbailey ARM rates move less than fixed, so definitely wouldn't pay 1% for the privilege of locking it in now at 4.25% (today's 3.5% plus the .75% rate adjustment). I do have to tell you that one line rate offerings are often less than factual, and must be viewed with skepticism until confirmed. There was a great article in the Wall Street Journal last night concerning the accuracy of online ads, here's a link to it: http://online.wsj.com/article/SB20001424052702304176904579111663428990146.html?ru=yahoo?mod=yahoo_itp

- Ted R. - Oct 11, 2013 at 10:33AM

@Ted Rood Thanks for the feedback. Interesting article on WSJ. I'm looking at 10 year fixed, not ARM. Thanks again and best to you.

- warrenbailey - Oct 11, 2013 at 10:39AM

@warrenbailey Gotcha, not sure why I assumed an ARM. No way on earth I'd be paying 1% 9 months in advance to lock in a 10 year fixed rate of 3.75% or higher. Plenty of time to address getting the best possible rate without incurring the additional costs of a long term lock. Glad to help if you'd like a rate comparison as you get closer to completion of your home.

- Ted R. - Oct 12, 2013 at 2:43AM
1 Answer

Hard to answer without a little more info. When you say 3/4%, are you talking about the cost of the lock (ie: $750 on a $100,000 loan), OR do you mean 3/4% to the actual rate?? Former would be a good deal, later not so much. Are you locked in to this particular lender due to builder incentives or other commitment? If so, you have less options and a longer term lock may make more sense. Do you have to pay the 3/4% upfront (in order to do the 180 day lock? (as is usually the case), or is the cost just applied at closing? "Best Execution" rates right now are near 4.25%, meaning an ideal borrower could get 4.25% with no points. If you could guarantee 4.25%, with 3/4% origination fee, you could certainly do far worse. If their current rate is significantly above 4.25% (barring credit or other loan pricing adjustments), might be prudent to look at all your options prior to committing at this early stage. Lots of thoughts, I know, hope they help. Ted