Real Estate Loans: Locking Good Mortgage Rates

One of the main things that you need to do as a homeowner or potential home owner is to find a low interest rate

. Your interest rate directly determines how expensive your monthly payments are going to be. If you take the time to do your homework and research you should be able to find the best mortgage rate possible for you.

Now comes the bad news.

You may have seen an advertisement for a specific low interest rate that may not be available to you when you end up closing on your home many months from when you first found this rate. Interest rates can increase or decrease every single day so months could have a huge impact on the rate that is available. The advertisements you see will advertise a rate that is possible but not always the rate you will end up with. In order to secure an interest rate you must lock the number that you see in with a mortgage rate lock.

What is a rate lock?

In simple terms a mortgage rate lock guarantees the borrower that they will have that same interest rate on their mortgage when they close on the home. It is made between the lender which is the bank and the borrower. Since it can take months to complete the application process and even longer before you close on the home it is critical that you get a rate lock. You may see a rate advertised so you apply and three weeks later you may get approved but a higher interest rate is standard. A lock protects you from this.

It can also be possible for the rate to switch from the time that you were given financing to the time that you officially close on the house. Locks can occur anytime during the home buying process but some typical spots are when the application was put on file, once it has been officially approved, or while the loan is actually in the steps of processing.

Locking in Savings

Your interest rate will affect how much you pay on the home during the lifetime of the loan and your monthly payments as well so it is important to be certain that you lock your interest rate in when you get involved in the process.

When to Lock

Locking in rates is something everyone should do but the question rises to when it should be done. Some people rush to lock in as soon as they can because they have a fear that interest rates will rise in the short term but it may not always be the best decision financially.

It can save money to lock in interest rates but there may be a cost associated with it as well. Mortgage lenders can assess a variety of fees and charges in order to lock the loan for you. Many will require that you get a slightly higher rate in order to lock it in at the present time while others charge a lock deposit in order to place an interest rate lock. Some borrowers may also be subjected to pay points to get a rate lock which can be either a set fixed number or floating which can be modified over a certain time period.

Lenders will function in a different way for locking in rates. Typically they work with tiers based on how many days the lock will be held for. Shorter locks such as thirty days or less are usually free and if you find the right lender they may offer a lock for up to forty five days completely free. Extensions to the base tiers are done in thirty day increments so every additional tier you have the lock implemented, you will face more fees for. A 120 day lock is going to be met with more costs than a 90 day lock for example. The fees are typically about a quarter point for every thirty days but each lender can be different depending on their policies.

You will be taking a gamble here because if you don't get the loan to close before the rate expires than the guarantee is off the table and you have the potential to lose any fees or deposits you put down in order to secure that rate. You will definitely be out of luck if the closing didn't occur because you forgot to do something or took too long but if the lender didn't uphold their part of the agreement and closing was delayed due to something they did, you may be able to still keep that rate but all situations vary.

Locks Don't Provide Unlimited Protection

It may be wise to lock in an interest rate but it will prevent you from getting a lower interest rate if rates happen to fall while you're in the process. Depending on the lender, you may be able to get a float down which allows the borrower to exchange their rate out one time for one that is lower during the home buying process.

Although a rate lock and float down may be smart moves, you may end up getting stuck with a higher interest rate if the terms in the lock agreement state that if interest rates rise they can also raise the interest rate but only a certain amount. You may get some protection but not the rate you agreed to at the beginning of the loan.

by: Lori English

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