June 14th, 2016 5:12 AM by Jackie A. Graves, President
Shopping for a mortgage is kind of like
playing the tables at Vegas: there’s skill and luck involved. One mortgage game to play is called “mortgage rate
lock.” Before you grab a chair at that table (or close on a home for sale
in Las Vegas, NV), learn the various situations in which you
should — and shouldn’t — lock in a mortgage rate.
A mortgage rate lock is an agreement you
strike with your lender (not your broker) that allows you to hold the current
interest rate for a specified number of days. If you don’t lock, your mortgage
rate could change by the time the loan paperwork is finished being processed.
And that means your debt-to-income ratio could increase enough that you no
longer qualify for your dream home, says Jay Hurst, president of Hurst Lending
& Insurance, a Texas-based
This is where your gambling smarts might
prove useful. If you think interest rates will rise … lock. If you think
they’ll fall, don’t lock, and let your bet ride. You could also wait for interest
rates to fall and then apply for a loan, but you might risk losing out on your
dream home if you’re not preapproved or the seller has competing offers from
other buyers who need less time to close. Ultimately, however, when interest
rates are at historic lows, it seems like a no-brainer to lock, and Raleigh,
NC, mortgage broker Ryan Fitzgerald emphatically agrees: “Yes! Homeowners
should be locking in these rates.”
The rate for a 30-year fixed mortgage in May
2016 was 3.76%. That’s slightly higher than the low in November 2012 of 3.31%
but a far cry from about
18% in 1981. Locking
also may give you peace of mind. “Rates are sort of like gas prices,” says
Hurst. “They usually drift slowly on the way down but can jump up half a point
Read your lender, and if you feel that
they might be pushing you into locking, don’t be afraid to call
their bluff. It might be the right move, but remember that the “house” (in this
case, your lender, not a Vegas casino) has an incentive to get you to lock in
your rate. You see, locking isn’t free.
“The longer the duration of a loan lock, the more it will cost in terms of
basis points that are reflected in the mortgage rate,” says mortgage consultant
Martin Hess of Nationwide Mortgage. You might not be charged an upfront fee to
lock, but you will be charged a higher interest rate.
Just how much you’ll be charged depends on
how long a period you choose. The difference between a 15-day lock and a 60-day
lock, for example, could be significant, as much as half a percentage point (50
basis points). On a $300,000 loan, that works out to about $100 more a month.
The shorter the lock period you take, the
riskier the bet. The lock will be cheaper, but the loan process might take
longer than your lock period. “I recommend a mortgage lock
of 45 days because that’s a realistic assessment of how long it will take to
close a loan from the moment the application process begins,” says Hess.
However, if the lock does expire before you close, all is not lost. “A borrower
typically will get one extension to relock a loan for another duration period,”
says Hess. But the lender will typically reflect the extension by increasing
the interest rate.
A “float-down option” (which automatically
readjusts your locked-in rate downward if interest rates decrease) is another
route. “If rates happen to fall significantly after you lock in your rate, this
gives you a one-time opportunity to lower your rate,” says Colin Robertson, a
mortgage lending expert. You might be charged to do this, but not always. Or
you could simply try to renegotiate your rate with your lender. Some
lenders might agree to new terms to keep your business, says Robertson.
If you locked and mortgage rates go down, you
lose. You can back out of the deal, but it’ll usually cost you; the lender
might charge you a cancellation fee. Make sure you’re educated on the risk and
reward so that you can make an informed decision — instead of rolling the dice
and simply hoping for the best.
Laura Agadoni - To view the original article click here