Before most of us can even think of buying a home, we must shop around for a mortgage. In fact, a 2013 study by American Community Survey revealed that two-thirds of all housing units are occupied by a mortgage-holder.
As you might imagine, a mortgage is serious financial business involving credit reports, bank statements, and other methods of verifying your income and stability as loan grantee.
Fortunately, you do have some negotiating power in the mortgage process as a buyer— mainly by establishing a rate lock.
What Is a Rate Lock, You Ask?
A rate lock protects the borrower from unpredictable, rising interest rates. In basic terms, a rate lock is an agreement between you and your lender to freeze the interest rate on your mortgage.
It is a guarantee to freeze your interest rate wherever it is at the time of signing. The way mortgage companies arrive at the specific interest rate is on a point-based system that takes your finances into account as well as the size of your loan amount.
Essentially, every point you earn in this system translates to a better interest rate at a certain price and for a specific time period.
It’s important to remember that mortgage rates change daily or even hourly based on the market. As The Wall Street Journal once pointed out, following the weekly rates on 15-year and 30-year mortgages is a bit like a roller coaster.
But through rate locks, you might have the ability to freeze a low rate and therefore get a better deal on your mortgage. Obviously, this will save you money that you can put toward furniture, movers, and other living expenses associated with buying a new home.
Timing Is Everything.
The art of rate locking requires a knowledge of loan processing and a steady eye on market fluctuations. A rate lock is good for only a window of time, usually either 30, 60, or 90 days.
The goal is to sign your rate lock agreement at a time when the interest rates are down and when you have firm knowledge that the loan will be processed within that window of time. For those reasons, most experts recommend that you sign a purchase agreement before discussing rate locks.
It is critical not to lock in a rate too early because loan processing may take longer than expected. In a worst case scenario, your rate lock would be nullified. If this happens, you might incur some extra costs for a re-lock or be subjected to a worse rate.
So what’s important here is to hit the sweet spot between a low interest rate and a workable window of time.
Making the Most of Your Lock
Agreeing to a rate lock is usually binding, meaning that you are stuck with it even if the market rates fall a day later. There are, however, some exceptions to this rule.
When reading over your lender contract, make sure that there is a so-called “float down” provision, which would state that if the rate drops during your lock period, you can take advantage of the lower rate (typically, this provision is stated at the top of your Loan Estimate).
Lenders may charge a small fee for the flexible rate lock, but don’t be afraid to ask. And if all else fails, you could request to renegotiate your contract.
Are Rate Locks Worth It?
In a word, yes. With the correct approach, you could potentially earn huge savings on your mortgage. There is a definitely a difference in terms of short-term or long-term rate locks to consider.
Short term rate locks are often free or cost up to .25 or .5 percent of the total loan, or even as little as a few hundred dollars. Meanwhile, long-term rate locks while cost higher percentages, but offer a better security blanket should the loan process take longer than expected.
The best advice when choosing a rate lock is to do some research beforehand. Follow the fluctuation in mortgage rates for a few weeks. Find out the average time for processing loans in your area or ask your lender to estimate the time needed.
Take into account any other factors that could delay your settlement, such as unanticipated construction delays on a house or mistakes on your paperwork.
Quick Questions to Ask Your Lender About Rate Locks.
- When will the lender let you lock in the interest rate? When you apply? When the loan is approved?
- When will the lock-in be in writing? (This is a way to have a record of the lender’s agreement, in case of a dispute.)
- Does the lender charge a fee to lock in your interest rate? Does that fee increase for longer rate lock periods?
- How long does the lender expect the process of your loan to take?
- If your rate lock expires and you want to get another, will the lender charge an additional fee for the second one?
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