"LOCKING" THE RATE!
When interest rates trend upward, borrowers are more concerned about
protecting themselves by "locking in" their loan rate. A rate lock is
a lender's commitment to loan money at a pre-determined interest rate and fee
and to hold such commitment for a pre-determined time period. It is also a
commitment from the borrower to complete the loan with the agreed upon terms.
The primary factor that determines pricing is the length of time for the lock
period. A lender, for instance, might "guarantee" a borrower a 5.25%
interest rate at a cost of 1 point origination/discount fee as long as the loan
transaction is completed within 45 days. If the lock period were for a shorter
period of time (i.e. 15 days), perhaps the rate or the fee would adjust
downward. Should the loan transaction not be completed within the lock period,
it will expire. The typical rule upon expiration is that the borrower would be
required to accept (within 30 days following the lock expiration) either the
lock rate or current market rate, whichever is higher. This is to discourage
borrowers from merely letting a lock commitment expire just prior to closing
escrow with the expectation of acquiring a lower rate.
Obviously, borrowers would prefer a rate lock system that allowed them to
protect themselves from upward motion of interest rates but take advantage of
any rate reduction that might occur during their lock period. Called a
"float down", these arrangements are generally not available anymore,
but most lenders will consider re-negotiating the rate should a “significant”
Rate lock periods vary . . . usually 15, 30, 45 or 60 days. When the lender
is expected to "hold" the rate for more than the 15 day period, the
origination/discount fee usually increases slightly depending upon the length
of the lock, market conditions and the consequent "risk" to be
absorbed by the lender. Any additional cost can also depend upon the type of
loan acquired (i.e.; fixed, adjustable, conventional,
FHA, USDA or VA).
Most loans can be locked at the time of application or at any time during
the loan processing period. Some "jumbo" loans (i.e.; those loan
amounts in excess of $453,100) can be locked only for a maximum of 45 days, or,
in some instances, may be locked only after lender/underwriter approval.
Potential home buyers who regularly compare rates by calling lenders for
their "daily quote" can be confused when they are given varied rates
because each lender may be quoting for a different lock-in period. Be certain
that one is obtaining true comparison quotes when "shopping" rates.
It is advised that borrowers schedule a free pre-qualification interview rather
than merely shop rates. An interview will let the lender suggest the appropriate
loan product to meet the borrower's particular financial need(s). At the same
time, the lender can provide some guidance as to the best time frame for
locking your loan.
The alternative to locking in the rate is to allow the loan to "float
the market" during the loan processing period. The borrower can elect at
anytime during this float period to lock their loan or the loan can continue to
float toward the final stages of the loan process. The question, then, is
should one lock or float? This is usually the borrower's decision alone and can
seem like a bit of a gamble. While no one can know for sure what interest rates
are likely to do over any particular period of time, consultation with the
Lender and Realtor(s) is always available to assist in trying to acquire the
"best" rate possible.
One final thought . . . after deciding to lock your loan, don't second guess
your decision. Remember, you selected the rate, you can't change it, stop
worrying about it. An eighth of a percent is likely to make little difference
in your payment anyway, so don't make yourself crazy over having missed that
very lowest rate.
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