Shopping for a mortgage can be complete of pitfalls for the unwary. One of the things that can be a real problem is fluctuations in mortgage loan interest rates. The rate that may be obtainable to you when you start shopping may not be obtainable when you reach the closing table. With a locked-in interest rate you are guaranteed to pay the rate you locked-in. That can be a great thing if interest rates go into an upward swing in the weeks or already months you may wait while your application is being processed. If the rates go down however it may not be so good.
What Is a Mortgage Rate Lock?
A mortgage rate lock or “mortgage lock-in” is a commitment from the lender to keep up the interest rate and points quoted to you for your mortgage. The potential is usually only good for the amount of time it takes for your loan application to be processed. Sometimes, depending on the lender you may be able to acquire a lock-in rate at almost any point in the loan course of action.
What Happens if You Do Not Lock-in Your Terms?
If you choose not to lock-in your rate it is possible you will get to the closing table only to find that you can not longer provide your loan. Because interest rates are in continued flux the rates and terms you are quoted when you put in your loan application may not be obtainable to you weeks or months later when you are ready to truly close on your mortgage. The rates obtainable at closing are what you will pay.
Things To Consider When Locking In Your Loan
When you decide to lock a loan, there are 3 things you should consider; points, length and cost of the lock agreement and interest rates.
Length of The Agreement
The length of a lock-in rate is not set in stone forever. The longer the lock-in agreement the more the privilege will cost you. You need to set a lock-in agreement long enough to give your loan time to close. If your lock-in expires before closing you may not be able to take advantage of the agreement.
Cost Of The Agreement
A lock-in agreement that is set for 30 days may cost you about ½ a point while a 60 day lock-in may cost you a complete point. Lock-in fees are generally paid at the closing table so if you never close the loan you will not be responsible for the cost.
Number Of Points
Points are the additional charges that are imposed by the lender and are prepaid by you at closing. Points can often be financed into the mortgage amount usually by turning them into interest points. One point =one percent interest rate on your loan.
The Interest Rate Itself
The fluctuations of interest rates are why we are here. You need to lock-in the interest rate you wish to pay before they go up. But be careful, lock-in your rate too soon and you may sacrifice a lower rate later!
Disadvantages of Mortgage Rate Locks
The only real disadvantage of a rate lock-in is in the event that interest rates decline while your loan is being processed. However since a loan lock-in is not a formal contract there is no reason for you not to look for a better deal if that happens to you.