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KASS: Look at the fine print before you lock

DEAR BENNY: What exactly is a “lock”? We are purchasing a condo, and the lender asked if we want to lock in the rate. We told him yes, but we are not sure what that means and whether we should have said “yes.” – Katherine

DEAR KATHERINE: I think you made the right decision, but it should have been made after doing your homework. A rate-lock is a contract between you – the home mortgage borrower – and your lender, guaranteeing a fixed interest rate.

According to the Consumer Financial Protection Bureau (CFPB), “mortgage interest rates can change daily, sometimes hourly. If your interest rate is locked, your rate won’t change between now and closing, as long as you close within the specified time frame and there are no changes to your application. Rate locks are typically available for 30, 45, or 60 days, or sometimes longer.”

The Federal Reserve Board recently increased the federal funds rate – the rate that banks charge each other when borrowing money. On the same day of the increase, major banks increased the interest rate they charge mortgage borrowers. (Note: As of this writing, they did not increase the rate on savings accounts).

And the Fed has indicated that unless conditions changed, it would continue to slowly increase the rate.

What does it mean to home buyers? For the last several years, mortgage interest rates have been historically low. That won’t last. So Katherine, if you locked in a low rate, make sure you can close in the time-frame stated in your lock agreement.

But there may be a problem. As a result of the new settlement procedures authorized by the CFPB, it will most likely take longer to go from contract to closing. So in my opinion, borrowers who want to lock in their rate should opt for at least a 45-day lock.

What if the locked-in rate goes down? Some lenders will allow you to get a lower market rate; others will not.

And there is yet another problem. According to the CFPB, your lender must provide you with a loan estimate, which “will state whether or not your rate is locked but it will not provide you with information about how much it would cost to extend the rate lock, how much you are paying for the specific rate lock time frame, or whether you could pay more or less for a different time frame.”

And the CFPB concludes with this good advice: “ask your lender about all these issues before you lock yourself in.” For more information, go to www.consumerfinance.com.

DEAR BENNY: We have just paid off our mortgage – which we held for 17 years. During that time we refinanced twice. We are in our 70s. Our health is good, and we hope to live in our condo for many years. In the interest of downsizing, however, I want to discard the stacks of paper work from that period. What should I keep? And what can I shred? – Alice.

DEAR ALICE: First, I would keep all of your settlement statements, called HUD-1s, and contracts for any improvements you made for at least three years after you sell your condo. You and your husband can take advantage of the up-to-$500,000 exclusion of gain if you lived in and owned the property for two out of the last five years before it is sold.

But because you have owned the property for a long time, there is a possibility that your gain, or profit, may be over $500,000. In that case, you want to increase your tax basis. Let’s say you paid $100,000 and it is now worth $700,000. Your basis for tax purposes is $100,000, and your profit is thus $600,000 ($700,000-$100,000). But there are items that can increase your basis so your gain will be less. For example, were there any capital improvements, such as installing a new room or adding central air, or did you pay any legal fees to file for a reduction in your real estate tax?

You must be able to prove these items, and thus keeping those records is your best approach.

As to other records you should keep, I suggest going to the IRS website and typing in “How long should I keep records.” There is a very helpful document on that topic. (www.irs.gov).

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: mailbag@kmklawyers.com.

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