Buying a home is a complicated, time consuming and sometimes confusing undertaking. Because loan applications take an average of 20-45 days to process, locking a loan is an important step to safeguard the borrower from constantly changing interest rates. A lock secures a specific interest rate and points on a mortgage for an agreed upon time period. Once a loan is locked, even if interest rates fluctuate, the buyer has a guaranteed rate as long as he or she closes on the loan within the designated time period.
Lenders offer options for the length of time a lock is valid, typically 15, 30, 45, 60 or 90 days. Generally, a longer lock means higher costs to the borrower because the lender takes a greater interest rate risk. Typically, there is no cost to lock the loan, however lenders may charge a fee up-front for extended lock periods (lock periods of 90 days or longer). This fee would be forfeited if the loan fails to close.
Working with a Lender
Buyers today have lots of lender choices beyond the corner bank. Online lenders abound. A borrower should choose a lender that offers a favorable rate with an excellent reputation for honesty and long-term customer service. Once buyers decide on a lender, they submit a mortgage loan application. Within three days of the submission, lenders provide a Good Faith Estimate (GFE) outlining, with as much accuracy as possible, all expected closing costs – such as lender origination fees and escrow costs.
Once a borrower asks his or her lender to lock the loan, the lender should provide the borrower with an updated GFE and Truth in Lending documents to reflect the new terms of the loan. When these documents are signed, the loan is officially locked. Borrowers should request a Mortgage Rate Lock Agreement to ensure no confusion or misunderstanding about the terms of the loan. With confirmation, borrowers can enter into purchase agreements with confidence, knowing the exact costs of their mortgages.
When to Lock a Loan
It’s difficult to assume how long it will take to buy a house. Even once a buyer finds the right house, the process can drag on. Sometimes sellers’ moving plans fall through or a home inspection reveals a major flaw that the buyer and seller need to negotiate.
Some lenders may allow buyers to lock once a loan is approved, but most buyers wait until they’ve chosen a home to buy and have signed an agreement with the seller. Otherwise lenders may charge higher fees for an extended lock period. If the lock term expires before the borrower buys a home, some lenders may consider extending the lock terms for an additional fee. Others require a borrower to re-lock at the current market rate or the original rate, whichever is higher. Therefore, it’s not always the best choice to take the shorter lock period, even though it may be cheaper. Alternatively, borrowers might want to lock a loan before they make an offer or when rates drop to their benefit. The lower rate sometimes outweighs the cost of the extended lock fee.
If lock timelines are nearing their ends, borrowers can expedite the sale process by gathering relevant financial information for their lenders. Collect bank account numbers, pay stubs, tax forms, information about existing loans and expenses including rent or mortgages. Borrowers should be ready to quickly address any questions or deliver documentation to their lenders to keep the process moving swiftly to close before the lock expires.
Recover if Rates Drop
Locking in a loan is a bit of a gamble whether borrowers choose to lock or wait. If rates rise, the borrower has secured a better rate than if they’d waited. But if rates drop, buyers who locked still must close at the locked rate. Most lenders require borrowers to keep to the lock terms regardless whether the rate drops. However, some lenders offer a “float down” option (for a fee) which allows borrowers to get the lower rate if interest rates fall during their lock period. Buyers should carefully watch interest rates for months while house hunting, noting any trends indicating a good time to lock. Though, like the stock market, interest rates can be volatile and difficult to predict.
Therefore, borrowers should trust their lenders and discuss all of these variables before locking loans. When borrowers clearly understand the length and price of locks and their options if the locks expire or rates drop, then they can make educated decisions about locking their loans.
By Diana Fishlock