January 2nd, 2018 7:57 AM by Jackie A. Graves, President
What is a Rate Lock?
lock is a guarantee from a mortgage lender that they will give a mortgage loan
applicant a certain interest rate, at a certain price, for a specific time
period. The price for a mortgage loan is typically expressed as “points” paid
to obtain a specific interest rate. (Points are basically prepaid interest, so
the more points you pay, the lower the interest rate; 1 point equals 1 percent
of the loan amount.)
lock protects the borrower from rising interest rates: So, if the borrower
locks in a rate of 4 percent, he will only have to pay 4 percent interest even
if rates rise while he’s going through the loan application process. Usually, a
rate lock is good for 30, 45 or 60 days, though that time period can be shorter
or longer; once that period expires, the borrower is no longer guaranteed the
locked-in rate unless the lender agrees to extend it.
interest rates rise during your lock-in period, you will not be impacted — you
will still pay the lower rate that you locked in. If, however, you lock in a
rate but then rates drop, you typically will not be able to take advantage of
those lower rates; instead, you’ll pay the higher rate that you locked in.
There are some exceptions to this: First, if you have a so-called “float down”
provision — which states that if rates drop during the rate lock period, the
borrower can take advantage of the lower rates — in your written rate lock
agreement, you should be able to get a loan with the lower interest rate. (But
beware — putting this provision in your agreement can be costly, so you need to
think about how big of a risk falling interest rates might be to you). Second,
you can rewrite your rate lock so that it reflects the new, lower rate, but
this, too, can prove costly.
most people, it makes sense to first sign a purchase agreement on a specific
property before trying to lock in a mortgage rate. Then, find a mortgage
loan with a good interest rate (do your homework online to look
at available rates) and consider asking your lender to
(in writing) lock in the rate. But before you formalize the rate lock, consider
these things: First, you don’t want to lock in the rate too early on, as rate
locks are usually only good for between a few weeks to 60 days, so if your loan
doesn’t process within that period, your rate lock offer will no longer be
good. Therefore, you need to make sure that the duration of your lock-in will
give the lender enough time to process the loan. To do that, ask the lender to
share the average loan processing time and try to get the lender to lock-in
your rate for as long as possible to protect yourself.
things being equal, consumers should choose a longer rate lock period (these
usually range from a few weeks to 60 days) to ensure they can get the agreed
upon rate even if there are delays in processing the loan. But there’s a catch:
Sometimes if you pick a rate lock with a longer duration (say 90 days) the
interest rate won’t be as good as with a shorter duration rate lock period, or
the lender may charge a fee for this longer duration. Normally if a loan fails
to close within its lock period, the borrower will be charged the “worst case
scenario” price for a re-lock (the worst price between the original lock and
the current interest rate). Ask your lender to spell out the differences in
cost and rates for different duration periods.
Does it Cost Money to Lock in Your Rate?
rate locks cost money and sometimes they don’t. The rate lock fee may be a flat
fee, a percentage of the total mortgage amount or added into the interest rate
you lock in. The fees may be refundable or non-refundable. Typically,
short-term rate locks (those less than 60 days) are free or cost roughly up to
about 0.25 – 0.50 percent of the total loan, or a few hundred dollars. Lenders
typically charge more for longer-term rate locks.
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