How Your Settlement Date Can Lower Your Rate

Sometimes, saving money on your mortgage is as simple as picking a better closing date.

It's all about Rate Lock Commitments.

A Rate Lock Commitment is a bank's promise to honor a specific mortgage rate for a specific period of time. They are a lender's prediction of what mortgage markets will look like at some point in the future.

The future is murky, of course, so it follows that the longer the rate lock, the higher the bank's corresponding interest rate.

Banks have to compensate for "time risk".

Rate locks typically come in 15-day increments with the 30-day lock serving as the basis for all other pricing:

• 15-day rate lock : 1/8 percent lower than the 30-day rate lock


• 30-day rate lock : The basis for all other pricing


• 45-day rate lock : 1/8 percent higher than the 30-day rate lock


• 60-day rate lock : 1/4 percent higher than the 30-day rate lock

These aren't exact figures, of course. Spreads between rates can (and do) vary from lender-to-lender. On average, though, they're fairly close.

This is why choosing a closing date is so important to your mortgage rate. A 45-day closing may reduce your rate 0.125% versus a 46-day one.

Assuming a $250,000 home loan near today's rates, that's an annual difference of $236.

So, when negotiating a contract on a home, keep in mind how rate locks work to make sure you get the best rate possible. The shorter the length of your rate lock commitment, the more money you might save long-term.

A second money saving trick is adjusting your closing date towards the end of the month. At settlement you will pay interest from the date of settlement to the end of the month you settle in. For example, if you settle on the 5th of the month, you will pay 25 days interest. If you were to settle on the 25th of the month, you would only pay 5 days interest, reducing the cash needed at settlement by 20 days (or 2/3rds of your monthly interest payment). While this doesn't actually save money, it does help your cash flow at the time of settlement (when money always seems a little tight).

You might think it even smarter to settle on the last day of the month to minimize the interest payment, but with so many people trying to settle then, potential problems seem to pop up in timing which might end up with your settling on the 1st day of the following month if anything gets delayed, costing you even more cash than you wished - so keep a little cushion in there for surprises, and you should maximize your cash flow, have a few days to move before your next rental payment, and breath a little easier.