Lock in Interest Rate

When you are in the process of finalizing your home mortgage, if you are like most people, you are keenly aware of the current interest rates and how they may impact your monthly mortgage payment. Everyone wants to get the best rate possible and depending what’s happening in the financial markets and your specific circumstance with your home purchase there are different strategies for the best time to lock in your interest rate.This article will look at interest rate locking and give you some good insight as to things you should be thinking about when going through this aspect of the home mortgage process.

What is a locked-in rate?

A locked-in interest rate is essentially a promise from your lender. It protects you, the borrower, from potential rate fluctuations during the lock period negotiated – which could be anywhere from 10 to 60 days. At the same time, the lender can also lock in a certain number of “points” for you – points being additional lender fees you’d typically prepay at settlement or have financed by adding them to your mortgage amount. One point equals 1% of the total amount loaned.

Lenders have different options for setting the interest rate and points you’ll be charged. The primary options include:

• Locked-in Interest Rate/Locked-in Points – generally considered a “true” lock-in, given that neither your interest rate nor your points should increase above the lock-in agreement even if market conditions change;
• Locked-in Interest Rate/Floating Points –whereby the lender lets you lock in the interest rate, but points are free to float (rise or fall) in accordance with market fluctuations; and
• Floating Interest Rate/Floating Points – whereby the lender lets you lock in both your interest rate and points, but not until some point between application and settlement.

Ask your lender to explain these options further and indicate which of them, or which others, they make available to you.

When can my rate be locked in?

It all depends on the lender. Some may lock in your interest rate and the number of points they’re charging when you file your mortgage application. Others won’t accommodate you until your loan is being processed. And some will let you lock the rate in only when the loan is approved – or even later.

You may find it advantageous to get a lock-in when you apply for your loan. That’s because it often takes lenders a few weeks or more to prepare, document, and review your application, and the cost of a mortgage could very well rise in that time. If, however, your interest rate and points are locked in up front, you’ll be immune to increases while your application is being processed.

By the same token, a locked-in rate at filing could just as easily prevent you from taking advantage of price decreases that might ensue while you’re waiting for loan approval. Some lenders may be willing to go back and lock you in at a lower rate, should it present itself. But you can hardly count on that.

It’s worth pointing out here that a locked-in interest rate should not be confused with a loan commitment. True, some loan commitments include a lock-in. But all a loan commitment provides is a lender’s promise to loan you a specific amount of money at a future date. And you typically don’t get a loan commitment until your loan has been approved. You can expect a loan commitment to spell out the amount and other approved terms of your loan, how long the commitment is valid, and the lender’s conditions for making the loan.

Is my lock-in documented?

As with any other contractual arrangement, it’s wise to obtain written confirmation of any lock-in you negotiate. Not all lenders provide it automatically, however.

Some lenders prefer negotiating lock-in agreements over the telephone and making only an oral promise. Of course, try proving that oral promise should a dispute arise!

Other lenders use preprinted forms to record the terms of a lock-in agreement. The problem with that is, these forms often contain critical information reduced to fine print and difficult-to-understand “legalese.”

Rather than accepting a preprinted form on the spot, at face value, a better option would be to request one from your lender that hasn’t been filled out yet and read it carefully before you even apply for a loan.

Showing the form to a lawyer or real-estate professional might be wise, too.

However you get it, and in whatever form, a written lock-in agreement gives you the opportunity to study the terms of your agreement and fully understand what your lender expects of you. Besides that, it definitely gives you a leg up if you get into a dispute with your lender.

Will a lock-in cost me anything extra?

The short answer? Not necessarily – but probably.

As to the nature of the charges, their amount, and how they might be applied, a lot of variables come into play.

Some lenders may charge you a lock-in fee up front. They may not refund it, either, should you withdraw your application, be denied credit, or not close the loan.

Other lenders may charge a fee at settlement.

The amount of the fee and other terms might depend on the length of the lock-in period negotiated.

Whatever the case, your charge might be either a flat fee, a percentage of the mortgage amount, or a fraction of the percentage point added to whatever rate you lock in.

How long is my lock-in valid?

That depends on your lender and the lock-in terms you negotiate.

The rule of thumb is that the lock-in period should be long enough to allow for the settlement of your loan and any other contingencies the lender imposes.

Typically, lock-ins are valid for 30 or 60 days. Some lenders insist on shorter periods, though – say, 10 or 15 days. But 45-day periods aren’t unheard of, nor are longer periods of up to 120 days. Be prepared, though: if you’re granted a longer period, you’ll be charged a higher fee.

Don’t agree to any lock-in period without first asking your lender how long it normally takes them to process loans. Ask them, too, for an estimate of how long they think it’ll take to process your loan. And get that estimate in writing, if you can.

Keep in mind that all sorts of things can delay your settlement: the time it takes to gather background on your financial condition, for instance … or construction delays in getting that new home you’re buying completed. You can’t plan for these things, of course. Just be aware that they may impinge on the lock-in period you negotiate with your lender.

Bottom line: Ask for as long a rate-lock period as you can get. Sure, you’ll likely pay a higher fee for it. But at least you’ll be covered for most contingencies that could run your rate-lock out.

What if I don’t settle within the lock-in period?

If your lock-in period expires before your settlement, you could very well lose the interest rate and the number of points you’d locked in. Delays like those mentioned above can cause this. But so can things like your lender having to wait for documents from employers, appraisers, builders, inspectors, or realtors. And sometimes lenders cause you to lose your lock-in because of processing delays at their end.

Should this happen, your lender might – just might – be willing to extend the lock-in rate. But that might not be an option for them. And that’s usually because they can no longer sell the loan to investors at that rate. This doesn’t necessarily mean you’re out a loan, though. You still might be able to get one based on prevailing interest rates and point offerings. What most lenders would do is charge you the difference between the fee they charged for your original lock-in and the current interest rate. No, it’s not ideal. It’s just likely the best you can get, under the circumstances.

Can I do anything to speed up my loan approval?

To a large degree, your lender controls the speed of the approval process. You’re not without leverage, though.

If you want to hurry things up a bit, find out from your lender beforehand what documentation is required, and bring it with you when you apply for a loan. Essential documents typically include …

• The purchase contract for the home you’re buying (available from the seller or realtor if you don’t have it),
• Your bank account numbers and latest bank statement as well as the address of your bank branch,
• Proof of employment – your most recent pay stubs, W-2 forms, and anything else that might serve as verification,
• Balance sheets, tax returns for the last 2 or 3 years, and other information about your business if you’re self-employed,
• Information about any debt you owe – with loan and credit-card account numbers as well as the names and addresses of your creditors,
• Cancelled checks or whatever other evidence you have of your mortgage or rentalpayments, and
• A Certificate of Eligibility from the Veterans Administration if you’re applying for a VA-guaranteed loan.

Later, when your loan is being processed, the lender may request additional information from you. The quicker you provide it, the less excuse the lender has for being the cause of any delays.

It helps also to keep in touch throughout the process with your lender and real-estate agent, not to mention others from whom you may need additional information pertinent to your loan. Keep good notes of your conversations, too, for future reference.

By following these suggestions, you should be able to lock in the best interest rate and the greatest number of points relevant to your mortgage application.