Locking the loan rate protects you against the possibility of an
increase in market interest rates during the period between the
lock date and the loan closing.
Remember, rates change all the time, and it can be one or two
months between the time you apply for a loan and when your sale
closes... and rates can have jumped in that time.
A lock commits the lender to lend at a specified interest rate
and points, provided the loan is closed within the specified
"lock period." For example, a lender agrees to lock a 30-year
fixed-rate mortgage of $200,000 at 7.5 percent and 1 point for
30 days. The lock lapses if the loan doesn't close within 30
days. A lock imposes a cost on the lender, and the longer the
lock period, the higher the cost. This cost is in the price
quoted to borrowers. The lender who quotes 7.5 percent and 1
point for a 30-day lock, for example, might charge .875 points
for a 15-day lock, and 1.125-1.25 points for a 60-day lock.
Some borrowers elect to "float" the rate, meaning not to lock
it, as long as possible. If the market is stable, they expect to
benefit from the declining lock price. They may also believe
that market rates will decline.
It would be pretty silly for a home purchaser who barely
qualifies at today's rate to risk a rate increase - if rates
jump they may no longer qualify for the loan. But even if
qualification is not an issue, floating past the point where you
can change loan providers is risky if you have no way to monitor
the market price on the day you finally lock. If the market
price on the day you lock is what the loan provider says it is,
you are at his mercy. (Some will pad the price just because you
have nowhere to go.) On a refinance, you can always change loan
providers, so it's safer to delay the lock until shortly before
closing.
Allowing the price to float on a purchase transaction is safe if
you have a way to check the market price on the day you lock. If
you originally shopped the lender's website and found your price
there, you can check it again on the lock day. Otherwise, don't
float, except in certain circumstances.
Borrowers who are refinancing can monitor the floating interest
rate/points quoted to them by the broker against other market
information, and if the quote appears out of line they can bail
out - after all, you don't have to refinance, you just want to.
Home buyers with a scheduled closing, however, eventually reach
the point of no return where it's too late to start mortgage
shopping all over again. During a refinancing boom period, when
loan processing takes longer, the point of no return might be 45
days rather than the 30 days that might be okay in a more normal
market.
To protect yourself, just don't float past the point where you
can bail out and shop elsewhere. Or, you should pin down the
lender or broker on an objective procedure for determining the
market interest rate. One simple and fair rule is that the
market rate will be the rate that the lender is quoting to
potential new customers on the same day. If you lock only a few
days before closing, your rate should be the lender's current
float rate. If you lock 15 days before closing, your rate should
be the lender's 15-day lock rate on that day. And so on.
One advantage of dealing with an individual lender or broker who
is internet savy is that they can provide you with the data you
need to monitor the rate they give you when you lock.
About the author:
Gus Skarlis is the only person in America that can get you the
best loan program, get you any vehicle at dealer cost, show you
how to correct your credit, beat any speeding ticket without
using a lawyer and save you money at the Gas Pump everytime...
You can find his infomational site at
http://www.GusSkarlis.com
or you can contact him directly at 702-491-7251
