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I'm newer to investing, but I've come across options contracts now and then which to my understanding allow the option to buy or sell a stock at a certain price.

After a discussion with a coworker at lunch I became curious about if the same thing exists for mortgages. Some googling seems to indicate that there are in fact similar deals for buying the exclusive option to buy a house.

Does something analogous exist for locking in interest rates on a potential future mortgage? As an example scenario: "I would like to buy the option of obtaining a mortgage of $250,000 at 4% for the next 5 years"

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    http://www.bankrate.com/finance/mortgages/questions-rate-lock-answered.aspx – Ross Sep 18 '15 at 17:47
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I think the answer to this is just "no." It's not commonly available to have the option to obtain a mortgage at a fixed amount and fixed rate, especially over a timeframe like the 5 yrs you mentioned in your question. There would be several practical problems with such a thing, including but not limited to:

  • It's not clear that the market for such an instrument is large enough to make it worth any institution creating it.
  • The options contract would have to have a lot of terms that covered your suitability for having such a loan not just now but in the future. These terms would tend to make the option less useful.
  • Alternatively significant risks (such as a drop in your income over the next 5 yrs) would need to be priced into the contract. I don't think anyone knows how to do that pricing, and even if they did the cost of buying the contract might be prohibitive. (The Black-Scholes equation used to price stock options, for example, would not apply because many of the assumptions do not hold in your mortgage scenario.)
  • The contract would need to specify also where the house is to be purchased, not just the amount. Rates and terms vary by location even under normal circumstances, and any risks associated with these factors would only be greater over a multi-year period.
  • Usually with any sort of "standardized" option, you can sell your rights to someone else. This is part of what makes the risk of paying the premium acceptable. You would not be able to sell your option for a mortgage to someone else because it would be tied to your personal credit worthiness.

As was noted in a comment to your question, it is common to be able to "lock" a rate over a period of days to weeks. This isn't the same as what you asked though, because it's much shorter term and it's typically tied to having an offer accepted on a specific house.

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