Two Questions - Best Scenario?

First Q - Building a house and getting closer to move-in date....haven't locked yet but my lender is now pushing for a 45 day lock. I have been watching this site (which is fabulous) and observed a lot of recommendations to not lock until 2 weeks or less out from close. I probably have a higher tolerance for risk after watching this site daily since June. Please advise. I'm looking for best product/pricing and my scores are in the 720s. 2nd Q - lender is suggesting a product wo PMI with a slightly higher interest rate that breaks even in 7 years (we expect to be in the home about 7 years). I would like to look at 7/1 ARM scenarios - one paying PMI upfront and one that includes PMI in the payment. Housing prices are rising in our area. Our house already has equity because the builder has already raised the base price since we signed our contract plus we have about 11% down. I feel that a 30 yr conventional loan with a higher rate that breakseven in 7 years is not the best product - any thoughts?

The cost difference between a 30 day lock and a 45 day lock is usually .125% of the loan amount so on a 300k loan that would save you $375 in fees. Make sure your lender has a 14 day lock or 21 day lock which could save you another .125 in fee. You mentioned locking two weeks out so that would be the cheapest option but the most risky in that you want to make sure the house will be complete and ready to move in on-time!

I personally have no problem with a 7 year arm as our economy seems to go into a recession ever 7-10 years so I see another chance for low rates in the future. But - even if you do move out in 7 yrs, why sell it? Why not rent it out and have someone else pay your mortgage? So, if you want to keep the house and not worry about the rate moving a 30 yr would be appropriate.

As for the PMI - I wouldn't carry PMI too far into the future if you can avoid it because it won't be tax deductible next year (2014). I would take the higher rate and have the increase write-offs into the future. Or - you could pay the PMI upfront as it is tax-deductible this year, so you can have a big write-off! Do the math and of course, pick the option you can afford.
One last thought is to take a higher rate or get some type of seller credit - perhaps by raising the purchase price and use that credit to pay for some or all of that upfront PMI. so, In summary, don't be pennywise and dollar foolish :)

- Bryan H. - Oct 25, 2013 at 4:59PM
1 Answer

One thing to consider is the likelihood that the home will be done on schedule. Your lender cannot grant final loan approval until the appraiser does a final inspection and it's underwritten. Many times builders seem to feel that the house just has to be done the closing date, in fact there's a gap of several days on more in most cases. As far as locking, the only thing worse than locking too early (then seeing rates decline further) is adding the cost of a lock extension on due to construction delays. We seem to be firmly stuck in a rate range, I'm usually pretty lock oriented, but not as averse to floating as usual after two months of decreasing rates. 7 year arms can run about .375% below 30 year fixed rates, I'd price both out and decide if the savings justify the potential risk. Hope that helps.