Q. What does it mean to float a rate?
A. Mortgage rates changes daily and in especially volatile markets they can change during the day. Floating or floating the rate is when you have put in a mortgage loan application for a home loan but the mortgage rate is not locked or set at a specific rate but rather floats and may vary with the daily market interest rate changes. While your mortgage rate floats, the interest rate on your home loan may go up and it may go down until the loan rate is locked. The mortgage rate must be locked prior to the closing date but it can float either by request of the loan applicant or because the applicant is ignorant about how mortgage loans and mortgage rates function. Of course, the mortgage payment will change as the mortgage rate changes.
The opposite dynamic of floating the rate is to lock the mortgage loan rate. When this happens the interest rate is fixed for that loan request for a predetermined period of time. The home loan should be settled or close during the time period covered by the loan lock or the loan lock is of no value. The loan lock can be performed at the time of the home loan application or anytime up to a few days prior to the home loan closing.
A mortgage applicant may float their loan because they believe mortgage rates are headed lower. This can be risky business, but many mortgage applicants have guessed wisely and made the assumption that mortgage rates will drop between the time they place the mortgage application and the time the loan closes and in fact the mortgage rates do fall and that new mortgage loan borrower has a lower rate.
Unfortunately, some mortgage lenders do not inform their customers about mortgage rate locks and the potential home loan borrower’s mortgage rate is floating because of this intentional lack of disclosure. When mortgage rates suddenly rise, that borrower is now going to find that their mortgage rate is higher or perhaps more loan fees how been added to the closing costs to cover the costs of obtaining the original quoted rate that is no longer available in the mortgage market.
When a potential mortgage applicant is shopping and comparing mortgage rates it is important to discuss the rate lock with the mortgage lender. Be sure to discuss how long the mortgage rate is good for. Mortgage loan locks and rate floating applies to both purchase transactions and refinances.
When you discuss the interest rate on a mortgage loan with a loan officer of a mortgage lender or bank, part of the discussion that is often left out is how long that mortgage rate is good for. Many mortgage loan officers quote mortgage rates that are short term rates. The rate difference between a long term commitment and a short term commitment may not be very much but there is a discernible difference.
Mortgage rates generally have commitment time periods of 15 days, 30 days, 45 days, 60 days and sometimes longer. If a mortgage applicant is applying for a home loan that is due to close in 40 days, a mortgage rate commitment for 15 days is essentially worthless. Loan officers sometimes quote that 15 day commitment rate because it is cheaper either with a lower mortgage rate or lower fees and this draws the customer in. Remember, the loan officer is a salesman first. Later the loan officer tells the applicant they are not locked, hopefully at the time the home loan application is filled out but often they do not tell them until the loan is ready to close. If rates fall the borrower may get a benefit and if they rise they are in for an unpleasant surprise.
Mortgage Lenders, Banker, Brokers, Oh My
Shopping for a home mortgage can be a daunting task. Not only do you have to shop the dizzying selection of mortgage loan products with varying mortgage rates and costs, but with the plethora of mortgage companies out there now you have to choose the type of mortgage lender too.
Choosing the mortgage lender by the type of organization should not be a challenge. Each lending institution will certainly have its strengths and weaknesses but the type of organization should not generally be a deciding factor for obtaining a home loan. Different mortgage lender will have differences in the variety the home loan offerings and mortgage rates between lenders and between regions where they operate but the differences in loan types is generally quite small.
There are exceptions to choosing a mortgage lender, for instance, if you are looking for a construction loan, not all lending institutions will be competitive for this type of home loan. Prospective home loan borrowers need to shop and compare loan products between mortgage lenders when the home loan request more specialized but this has little to do with the type of mortgage company itself.
The regional differences in products and the availability of home loan types and prices applies to brokers, bankers, credit unions, savings and loans and other licensed institutions that originate residential mortgages.
The term mortgage lender has usually been reserved for the financial institution that provides the actual funds at the home loan closing. However, since mortgages are frequently transferred, bought and sold in such a quick time frame, whether the institution that originates the loan is in fact the mortgage lender has become insignificant and most all mortgage originating companies are referred to as the mortgage lender.
There are hundreds of mortgage lenders and mortgage brokers available that will prequalify and preapprove a mortgage loan for almost any consumer looking to make a new home purchase or refinance an existing home loan. Major categories of mortgage lenders include:
Banks. A bank, commercial bank or savings and loan may have the largest financial backing and some of the strongest regulations in the mortgage lending marketplace. Banks and savings and loans which are also called thrift institutions were historically the largest traditional mortgage lenders of residential home mortgages. Mortgage brokers began taking a large share of mortgage origination’s starting in the 1980’s but the savings and loans and banks remain a major source of funding for home mortgage loans and for the time, appear to be perceived by consumers as being more reliable and responsible with mortgage lending.
Some banks will sell the home loans they originate shortly after funding the mortgage other banks don’t sell their home loans to other companies after closing. These banks collect the mortgage payments, manage the escrow accounts for taxes and insurance and maintain the relationship for the long term, but this process is becoming less frequent with home loans being bought and sold regularly and the servicing of the home loan either being retained by the bank or sold along with the loan. When home loan product began operating like a commodity and were bought and sold with regularity, the banks position in the mortgage lending market place diminished measurably however, the credit contraction has a brought a resurgence in mortgage origination’s being handled by banks.
Mortgage Bankers. Mortgage bankers often sell their mortgages to large mortgage servicers or to Fannie Mae and Freddie Mac, two major government-sponsored enterprises that specialize in buying residential mortgages from lenders. Mortgage bankers borrow money from banks or pools of investors, underwrite the loans, and sell them to investors for a profit. Mortgage bankers often receive a fee from these investors for servicing the mortgage if the mortgage banker retains the servicing for the home loan they originate. Mortgage servicing includes collecting monthly payments, sending out loan statements, and collecting on late payments.
Mortgage Brokers. A mortgage broker represents a wide assortment of products and can price home loans with great deal of flexibility since they often work with many mortgage lenders. Mortgage brokers do not make the mortgage loan but rather facilitate the process of obtaining a mortgage loan. The mortgage broker processes the mortgage loan request and may shop a home loan application among different mortgage lenders to find desirable home loan terms for the borrower. In exchange, the mortgage lender and/or the home loan borrower pays the broker a fee. This, however, does not necessarily mean that the consumer will get the best mortgage rate and home loan program or the loan officer’s best mortgage rate and loan program.
Credit Unions. Credit unions operate similar to banks but are owned by their members. Credit unions may offer very attractive home loan terms, particularly if they evaluate their entire banking relationship with you. Since they are nonprofit institutions, credit unions may offer attractive mortgage loan rates to their members. Like commercial mortgage lenders, credit unions sell their loans to Fannie Mae and Freddie Mac to maintain access to new sources of funds. The National Credit Union Administration (NCUA) regulates the credit union industry.
Mortgage bankers, credit unions, savings and loans and possibly more companies can offer home mortgages. With the rapid movement of mortgage money it may be a mistake to rely on one type of mortgage institution as being best as opposed to which mortgage company is chosen. Deciding which type of mortgage lender is best will rarely make any difference in the home loan process. Deciding on the mortgage lender or the originator is the important choice. The variability between mortgage companies in any one category of mortgage lender is so small as to make choosing a mortgage company by the type of organization a difficult task.
It is more important to choose a good loan officer and a reputable firm regardless of the organizational structure. Measuring a good mortgage lender or originating company may be a difficult task. During cautious times, more consumers rely on the regulation and size of the banking industry as the number choice for a mortgage loan. The structure of the mortgage lender is not what makes the home loan right but the ability to have ample resources to call upon and a known regulatory body in which to voice a complaint reassures many consumers that applying for a new home loan at a bank is the right choice. Many mortgage lenders have gone out of business, have been sold, or have stopped making certain kinds of loans, leaving their customers stranded and further reinforcing the apparent advantage held by banks.
Given this conclusion it is still essential to compare the mortgage lenders services and history since the services of that branch or that office is what makes the home loan right for any individual consumer.
Once it has been determined that a bank, mortgage lender or mortgage broker is offering the right home loan product at a favorable mortgage rate and overall cost, measuring quality can be difficult attribute to measure until the home loan process is complete. Quality can generally be regarded as prompt, efficient service from the mortgage rate quotes to question and answer sessions regarding the loan applicants’ needs to a trouble free home loan closing. Measuring the quality of those services in advance may be a challenge.
Along with shopping the source for the home loan, a potential home loan borrower will have to shop the total cost of the home loan including the mortgage rate, fees, points prepayment penalties the loan term and a host of other items.
A good starting point to choosing the right mortgage lender is to perform ample research on the home loan program and shop for the mortgage lender over the phone with sufficient knowledge on the types of home loans and how they are processed. Be sure to call more than one mortgage lender and use the online mortgage calculators to help compare mortgage rates and costs. Compare the services by measuring knowledge of the home loan programs, the questions they have for you and ask for references. Be an astute shopper and compare the mortgage loans, the mortgage rates, the closing costs and test the resources and knowledge of those mortgage lenders who are ultimately paid to help you obtain your mortgage loan.
Not-So-Glorious Home Ownership
According to any number of experts in the media, political arena and at backyard barbecues, we should all own our own homes. Home ownership has always been a goal in the United States as it makes a statement about the stability of your income and makes you a better citizen, among other things. Homeowners have long been extolled as being pillars of the moral society, being more involved in the community, and having more educated children. But how much of that is fact, and how much is mere propaganda?
Recent numbers have certainly shown that far too many Americans own homes that they can not afford. Mortgage delinquency is rising as more mortgage payments are slipping seriously past due. These homeowners fell victim to irrational pressures that push home ownership on the American people. People that are now trying to recover from financial loss associated with an unsustainable mortgage loan, credit problems and personal problems stemming from the desire to follow the propaganda pushing the American dream.
Is Home Ownership for Everyone?
If propaganda is to be believed, we should all own our own homes. Unfortunately, many people buy into this belief but fail to consider if, in fact, owning and maintaining their own home is really the right personal decision. There is no doubt society is telling you to buy a home. But it may very well be that your bank account, your lifestyle and your career are sending a very different message entirely.
There are many home loan programs available from the government and banks that have helped low income families become proud home owners with reduced mortgage down payment programs. Unfortunately, many of those homeowners are now staring at rising mortgage payments and imminent foreclosure. Many of these families and individuals took advantage of the sub prime lending craze that swept the nation in recent years thanks to overall low interest rates, low mortgage rates and in some cases additional government assistance.
Now, with mortgage rates creeping back up, mortgage loan payments are coming up too and money is getting tight. When these sub prime buyers are unable to pay their mortgage, they face eviction and foreclosure. Mortgage refinancing, which seemed like a viable option for mortgage payment relief, became more difficult and often involved an even higher mortgage rates. Not only have they lost any investment up to this point, they have also lost their credit rating and their pride. It’s hard to feel good about yourself after being kicked out of the home you were so proud to own a few short years ago as well as losing the mortgage down payment funds and any other money that may have allocated to make previous mortgage payments and housing maintenance.
Don’t Buy a Home
Home ownership isn’t for everyone. When you own a home you must have time and money to spend maintaining that property. You must learn how to cut and edge the lawn and how time consuming driving from the suburbs to the city can be. Many city dwellers who buy a home in the suburbs chafe at the sudden isolation and removal from community activities.
Others find their free time now consumed by drives to and from work every day. Still others realize that paying homeowner association dues and property taxes isn’t as much fun as they were anticipating.
Many homeowners are not only overwhelmed by the new mortgage payment, referred to as payment shock in the mortgage industry, especially when the home loan is based on an adjustable rate mortgage but are also unpleasantly surprised over the cost of maintenance. Maintenance does not just mean maintaining the yard and cleaning but unlike a rental unit in which the structure is maintained by the landlord, your home physical structure including plumbing, electrical and physical wear and tear is maintained by the home owner.
Buying a home isn’t the right choice for many people. If you are in a career that relocates you often, you may be frustrated trying to sell home after home and losing money in mortgage closing costs and commissions. You may also not be an ideal candidate for home ownership if you are at retirement age. Many retirees would do well to sell their homes (along with the maintenance they represent) and find a high-quality, well maintained rental instead.
But Is It Better To Own a Home?
There is some truth to studies that children are more successful academically in families that own homes. There is no difference between those children and children of long-term renters, however. It seems the mobility of families, not the home location is a factor in educational success. Your children will do just as well in a rental as a home, so long as you live there for a long period of time.
Home owners are not necessarily more involved in the community or better citizens, either. Again, the longer you are in a community, the more involved you are likely to become.
As evidence, you can look too many of the cities in Europe. In the United States, 70% of citizens own their own homes. In the well-educated, successful country of Switzerland, only 34% of residents own their own homes. In Berlin, a mere 11% are homeowners.
Perhaps your desire to own a house springs more from the pressure around you than your actual desire to plant a garden or build a porch. Consider strongly your motivation before following the rest of the country into the home buying craze. Study your own personal choices regarding time and your budget for both the mortgage loan down payment and the monthly mortgage payments. Investigate the mortgage programs available and mortgage rates and do not fall into a false sense of security believing that you can always refinance a high mortgage rate into another home loan. The mortgage calculators may be especially helpful in determining mortgage options and mortgage payments. But, the mortgage calculator and mortgage rates can not determine if the work, time and investment in home ownership matches your individual goals and needs.
Mortgage Closing Time and Tax Prorations
Prorations are items that are shared between the seller and the buyer at the time of a home loan closing. The largest prorations will be property taxes. Property taxes can be more complicated than other prorations because of the shear size of property taxes and the potential for increases in tax assessment that can occur either after the contract is signed and the closing on the property takes place or between the time of the last known tax bill and the time the property closing takes place. Tax proration is not a process involved in a mortgage refinance since there is no change in ownership on the property.
In many cases, the closing agent will use the property taxes from the previous year to determine the proration for the sale of the property. For example, let’s say that you close in August, but the new taxes aren’t available until November. Since you have only lived on the property for four months, if the taxes go up are you responsible for the taxes for the entire year? The converse can be true in some locations of the United States where county taxes are paying for services following the due date of the property tax bill. Fewer taxing authorities have you pay for future services and the problems lie with the property tax bill for past services.
In cases where a tax bill coming due is paying for prior months services the proration is a credit to the buyer which flows down to a credit for the funds needed to close on the home loan. At the time of the real estate closing the taxes payable have accrued on the property. As an example, if the property were located in a county that sends it tax bills out twice a year and the first bill is in July for the previous six months property taxes. If the purchase closes in March a proration credit is due the buyer. The buyer will be paying a bill in July that covers the months of March, April, May and June when he was in the property. But the bill also covers the months of January and February in which the seller still occupied the property. In this case, it would be customary for the seller to credit the buyer the amount of funds for those two months at the closing even though the tax bill for this time is not out yet.
The issue gets further complicated since the closing is taking place in March, the amount of the tax bill coming out in July is most likely unknown. It is certainly rare to see a county reduce the tax burden on real estate.
One way to solve this problem is for the buyer and the seller to sign a tax escalation or proration agreement into the purchase agreement. This means that the buyer and the seller have agreed to have an amount of the taxes credited to the borrower or seller greater than 100% of the most recent bill. 115% is a common figure used in the contract. The credit from the seller in the preceding example will now take the previous six month tax bill, divide that figure by the number of days the tax bill covers, this gives us the per day tax liability. This figure is multiplied by the amount of days the seller was in the property since the last tax bill up to the closing and then multiply that by 115% to get the credit for the buyer and the cost for the seller. If this escalation agreement is not part of the purchase contract, it is highly unlikely the seller will credit anything more other than what is mandatory.
It will be hard to get a complete grasp of the home loan closing process and funds needed to close on the mortgage loan without understanding the tax proration procedure. Tax proration will ultimately impact the amount of funds needed to bring to closing on a home loan. Most buyers and sellers don’t completely understand the prorations at the time of the mortgage or home loan closing; in fact many of the professionals at a real estate closing can’t explain the calculations on how all the funds disbursed. Make sure you fully understand any related prorations, consult the real estate agent, title company officer or your attorney regarding when property tax assessments are made, these figures will vary from state to state. Often the mortgage calculators available online can help to obtain estimates on the closing costs of a home loan including assisting with the tax proration.
Can You Save Money by Closing a Home Loan at the End of the Month?
In order to understand if you will be able to save money from closing at the end of the month, you have to learn some background information on how the mortgage loan closing costs are determined. You will want to start by comparing renting or rental payments to a mortgage payment. When you pay rent, you normally have to pay the bill at the start of each month for the forthcoming month, which is basically paying in advance. However, with your mortgage payments, the monthly mortgage payment normally pay off the interest that was built up on the principle balance throughout the previous month. Mortgage payments pay the interest in arrears as opposed to how the rent payment is paying for future use.
When you want to close on your house, you are generally able to do so at any time during the month. As an example let’s say your closing date is on October 15, which would mean that your first mortgage payment is due on December 1st. In order to maintain a level of homogeneity in the mortgage securities market most all primary mortgage payments are due on the first of the month. This payment on December 1st would include the interest for November since monthly mortgage payments pay the interest in arrears. However, what about the 16 days of October that remains between the closing on October 15 when you receive the money or the keys to the new home and November 1? The amount of interest that would be due for the rest of that month is paid at closing, which is sometimes called pre-paid interest or interim interest. You will notice that the closer to the latter part of the month you close on your house, the smaller the interim interest payment will be since there are fewer days from the home loan closing to the beginning of the next month.
If you are currently renting, but intend on purchasing a home, you will probably want to settle for an end-of-the-month closing because you will be able to be moved out of your rental home and into their new house before the next month’s rent is due.
Because of this, many people decide to close at the end of the month. By closing at the end of the month you wont save money but since the purchase closing requires the down payment, closing costs and the interim interest, it does reduce the cash needed to close significantly. On a standard purchase transaction this is a real financial outlay, which many homebuyers could desperately do without. However, if you aren’t concerned with having to pay an interim interest payment, than you will not likely be concerned about which day you close on the new home loan.
The role of interim interest in a refinance may be very different. In many cases a homeowner will add the amount of money needed for their refinance based on their home mortgage balance including any type of closing costs and escrows and any interim interest that is involved. Therefore, many homeowners considering a mortgage refinance assume that if they close at the end of the month the closing costs are lower. However, the main calculation many borrowers forget is the build-up of interim interest within their old mortgage loan.
You will find that many borrowers will call their current mortgage lender at the very beginning of the month to find out how much their principle balance is so they can make a payoff. The borrowers intention is to make the last payment on the old mortgage and keep the interim interest down on the new one. Many borrowers will find that if they decide to close near the end of the month, their payoff is much higher than the original quote. This is because of the amount of interest that has accumulated throughout that month on this home loan.
These individuals who are considering a mortgage refinance will not pay that month’s mortgage payment. An example of this would be if the closing on your mortgage refinance wasn’t until October 15, many borrowers wouldn’t pay their October 1st payment. They can successfully do this because many mortgage lenders will not count a payment as late till the 15th of each month. While this is not suggested many individuals still continue to perform their home mortgage refinance in this manner. However, they will quickly find out that at closing they will have to pay interest not only for September (which was what the October 1st bill was covering) but also interest for half of October.
If you wait to close at the end of the month it may seem like you are saving money. Of course, you are doing a mortgage refinancing for a reason. If that reason is a lower mortgage interest rate or a consolidation to pay off debts at a higher rate, it never pays to wait. The longer you wait to close the more interest you are accruing on your existing mortgage, since its rate is higher than the new mortgage refinance, you are paying more money each day you wait to refinance. Better to pay interim interest on the lower mortgage rate of the new home loan than a higher mortgage rate on the home mortgage you are refinancing.
There are some mortgage lenders that will give you something called an “interest credit” when you close for the first five days of a month. This is a credit of interest during these five days, which will ultimately be included within the upcoming payment. When there is an interest credit, the first payment will be on the very next month. An example is if you close on the 2nd of January, instead of 28 days of interim interest and a first payment March 1st, you will get a two day interest credit and the first payment will be due February 1st.
FHA loans actually accumulate interest from the beginning of the month to the end of the month no matter when they were paid off. Because of this, when you’re paying off an FHA home loan, you will need to properly time the closing so you do not have to pay double interest. FHA does not calculate the interest daily on an existing mortgage loan.
The bottom line is that the closing date may save money for out of pocket costs versus costs added to the loan amount but the ultimate savings is really only an accounting issue. The interest for the mortgage loan has to be paid one way or another regardless of when the loan closes.