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Tuesday, December 19, 2006

we are buying in a new development that is not closing for a year. Can we lock in an interest rate now?

hooking a rateask_id.gifThe popularity of new developments has made this a prominent issue recently, since the purchase is often made well before the building is actually habitable. It is one of the special considerations of this kind of purchase. It is not uncommon for a purchaser to have to wait from several months to a year or more, through a somewhat imperfect development schedule. Then be asked to close upon 30 days notice, once the developer obtains a temporary certificate of occupancy. A buyer in your position has a number of options.

It is important to note that your rate does not have to be locked in order to obtain a loan. Keep in mind that standard rate locks are 60 days and many lenders routinely offer 90-180 day locks. Until recently, the only option would have been to “float“ the rate until you were within 60-90 days of closing. You would thus be exposed to interest rate risk until then. Many borrowers are comfortable with floating rate commitments. For those who may not be, there are now a number of lenders offering 12-18 month locks. These extended rate locks may require lock in deposits, points, somewhat higher rates, or a combination of them. When considering a purchase involving an extended closing there are a couple of factors to consider. Your own tolerance for risk is primary. Since you are ultimately dealing with the long term behavior of the interest rate markets, a little cushion to compensate for the “roll of the dice” factor has to allowed for. The fact that you may be limiting yourself to fewer lenders, and possible additional costs should be noted too. It is recommended that you get the opinions and expertise of your real estate broker, attorney, and mortgage professional to make an informed decision.

Doug Adler is a senior loan officer with JP Morgan Chase. He has 20 years of experience as a real estate finance professional and can be reached at (212) 789-4052. This is Doug's first entry on comitini.com. Welcome!