Changing rates prompt early close


January 01, 1995|By Dian Hymer

What should I do if my interest rate lock-in expires before closing?

With today's rising interest rates, most buyers choose to lock in an interest rate. A lock-in is a guarantee from a lender to give the borrower a loan at a certain interest rate as long as the loan closes by a specific date.

Lock-ins usually vary anywhere from 15 to 60 days. You have to pay for the privilege of a rate-lock. How much you pay will vary with the lender, the type of loan and the length of the lock.

Complications can arise when financial markets change during the course of a transaction. Let's say interest rates are stable when you make an offer to buy a house. You and the seller agree to a 90-day closing, which gives you plenty of time to get a loan, give your landlord notice and save a few more dollars before you join the homeowner ranks. The 90 days also give the sellers more time they may need.

Two weeks into the transaction, interest rates jump and threaten to move higher before closing. You talk to your mortgage broker, or lender, and decide that it's wise to lock in a rate. You pay for the longest rate-lock you can get, which is 60 days. If you can't close the purchase two weeks earlier than your contract date, you will lose a desirable interest rate.

As soon as you know that you need to close early, ask the sellers to amend the purchase contract to permit the early closing. Get the agreement in writing. Verbal agreements aren't binding when they involve real estate matters,and memories often fade.

Sellers who can't change their moving plans might agree to close early if you allow them to rent back the property until the original contract closing date. This way you get your interest rate and the sellers aren't inconvenienced.

Usually sellers rent back at a cost that's equal to the buyers' cost of owning the home, called PITI (Principal, Interest, Taxes and Insurance). The buyers' PITI is usually calculated and paid on a per-day basis.

Sellers may object to an early close and rent-back if the buyers' PITI is much larger than the sellers' cost of ownership. In this case, explain to the sellers that they'll have their cash equity out of their home, which will start earning interest for them. They'll also be relieved of their house payments, and they'll have the certainty of a closed sale. If they still aren't eager to accommodate you, offer the rent-back at an amount that's less than your new cost of ownership. The lower interest you'll get by closing early will probably more than offset the amount you may be shy on the rent payment from the sellers.

FIRST-TIME TIP: Although most sellers will attempt to accommodate buyers who are in jeopardy of losing an interest rate, a seller doesn't have to agree to do so unless it's part of the purchase agreement. One way to ensure cooperation is to include a provision in the original purchase contract that requires them to close early, if necessary, in order for you to preserve an interest rate.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif. 94618.

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