Lock In Your Loan
The closest you may ever come to playing the stock market could be when you gamble for a lock-in while buying a home. A lock-in, rate-lock or rate commitment is a lender’s promise to hold a certain interest rate and points for you for a specified period of time. Points are additional charges imposed by the lender that are usually pre-paid by the consumer at settlement but can sometimes be financed by adding them to the loan amount. One point equals one percent of the loan amount.
Depending on the lender, you will lock in the interest rate and number of points you agree to pay either at time of application, during processing of the loan, at time of loan approval, or later.
A lock-in given at application may be useful when interest rates are on the rise, because lenders usually take several weeks to prepare, document, and evaluate loan applications. Without a lock-in, if interest rates soar, the cost of your mortgage will increase. So when you lock in your interest rate and points, you will be protected against rate increases during the application process. On the other hand, if interest rates are falling, it might be best to wait until after application approval to lock in at the last possible second. Deciding when to lock in can be the most challenging step of the loan application process. Lock in too early and lose out on interest cuts. Lock in too late and fall prey to rising rates.
Since the majority of a mortgage payment goes toward paying interest, the interest rate is a significant factor. For instance, every half a point of interest on a $175,000 loan will add about $15 per month to the payment. This may not seem important. Multiplied by 12 months a year, times 30 years, however, half a point will equal an additional $5,400 in interest over the life of the loan.
Lock-in agreements come in a variety of forms. Some lenders have pre-printed forms that state the agreement in exact terms. Others lock-in by telephone at the time of application. Although oral agreements can be difficult to prove in event of a dispute, they are just as valid as written agreements. Some lenders’ lock-in forms may contain crucial information that is difficult to understand or is in fine print. Thus, it is wise to obtain a blank copy of a lock-in form to read carefully before loan application. If possible, show the lock-in form to a lawyer or real estate professional.
Unfortunately, lock-ins are not always free. Lenders sometimes charge for securing the rate of interest and number of points. Some lenders charge up-front fees, which may or may not be refunded upon application withdrawal, if the application is later denied, or if the loan fails to close for some other reason. Other lenders charge the fee at settlement. The fee may be a flat fee, a percentage of the mortgage amount, or a fraction of a percentage point added to the lock-in rate. The amount of the fee and how it is collected will vary according to the lender.
Lock-ins are good for a certain interest rate and number of points for a given number of days. To get these terms, you must settle on the loan within a certain time period. Lock-ins of 30-60 days are common. However, some lenders only offer short-term lock-ins, good for seven days after loan approval.
When considering various loan companies, consider the following “lock-in” related questions before making your decision.
1. Does the lender offer a lock-in of the interest rate and points?
2. When will the lender let you lock in the interest rate and points?
3. Will the lock-in be in writing?
4. For how long will the lock-in be valid?
5. Does the lender charge a fee to lock-in the interest rate?
6. If you have locked in a rate only to discover that interest rates go down, can you lock-in at the lower rate? Does the lender charge an additional fee to lock-in at the lower rate?
7. Can you float your interest rate and points for now and lock them in later?
8. How long does the lender expect to take for loan processing?
9. What is the lender’s average time for processing loans?
10. Has the lender’s loan volume increased? Heavy volume might mean weak customer service and slow turn-around.
11. What rate will be charged if the lock-in expires before settlement?
12. If you don’t settle within the lock-in period, will the lender refund some or all of your application or lock-in fees?
13. If your lock-in expires and you want to get another lock-in at the rate, will the lender charge an additional fee for the second lock-in?
Pre-approval, as opposed to pre-qualification, signifies that the loan application has been taken through a rigorous procedure. Here's why pre-approved buyers are ahead in the home buying game:
If you make an offer on a home and then apply for a loan, you are at the lender’s mercy, who is aware that you do not have time to shop around.
Pre-approval saves time spent looking at houses you can’t afford.
A pre-approval letter from a lender gives you an edge when multiple offers have been made on a house.
Pre-approved buyers can generally close escrow more quickly, since most of the work has already been done.