One obstacle I came across with homebuyers that I worked with time and again always seemed to rear its ugly head right about the time we started talking about locking their mortgage rate. And usually, this is because buyers tend to get a little gun shy when it comes time to lock their rate; it's a final commitment, a scary hurdle or they want to wait and see if rates drop just a hair more. However, doing a little homework on locking your rate ahead of time leaves you with a little more leverage when the time comes to pull the proverbial trigger. Here are the five things that all of my clients needed to know about locking a mortgage rate, that might just help you too.
What is a rate lock?
A rate lock is a guarantee from the lender stating that they will offer the borrower a specific combination of interest rate and points. Typically, a point is a fee (or a rebate) equal to one percent of the total loan amount.
What many of my clients didn't understand about rate locks is that they are designed to protect borrowers from rate fluctuations for the duration of the lock. If mortgage rates rise after a borrower locks his or her rate, the borrower is still guaranteed the lower rate -- even if it is to the lender's detriment. More often than not, that is what I would see happen; lenders extending rate locks for borrowers, free of charge. While that isn't always the case, there is usually some flexibility involved.
When can a rate be locked?
In my experience, buyers usually have to wait until a seller has accepted their purchase offer for a specific property to lock a rate. Rates are generally not locked before a buyer goes home shopping. In fact, the first thing I would advise buyers to do, once our option period was up and inspections complete was lock their rate.
How long can a rate be floated?
I have had some buyers float their rate until just days before closing. However, that's not the best (nor the most practical) way to buy a home. Since rates are instrumental to the closing process, locking rates shortly after an option period is what I always recommended. All the same, if buyers insisted on waiting, I would advise waiting no more than 10 days before your scheduled closing to lock your rate.
How much does a rate lock cost?
When I helped buyers close, rate locks were not associated with a fee. However, I had to make sure that my buyers understood that a lock isn't free either. The thing my clients had to remember about rate locks is that they typically involve a higher interest rate, which is also more expensive for borrowers. The difference between a 15-day rate lock and 60-day rate lock might be as little as one-eighth or as much as one-half of a percentage point, but it adds up either way.
What happens if the rate lock expires before closing?
Not all of my buyer's stories had a happy ending with an extended rate lock. Some buyers would get stuck with the higher market rate because they locked a rate too soon, or waited too long to lock their rate, and when it comes to locking your rate, it can be a gamble.
The primary thing that buyers need to remember about locking their rate is that it all comes down to timing. I would tell my buyers to shop when rates were low, make a purchasing decision within 30 days of getting a pre-approval letter and lock a rate at least 10 days before our scheduled closing. Do that, and you'll have a rate you are almost certain to be happy with for years to come.
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