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Understanding Interest Rate Locks

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When consumers start to get serious about buying a home or maybe refinancing an existing mortgage, one of the first things that will be researched is interest rates. Interest rates help determine affordability and lenders use current market rates and terms to help prequalify and preapprove borrowers. It can be a bit confusing at times and maybe even overwhelming when looking at all the rate choices. There’s the note rate and the annual percentage rate and of course there are closing costs to consider. Different loan terms will have higher or lower rates. A 15 year rate will be a bit lower compared to a 30 year term using the exact same loan amount.

When calling around for current rates consumers can get an up-to-date rate quote but will also be informed that until an application is received and credit report reviewed, the quoted rate can vary between what was in initially quoted to the final rate at the settlement table. But what future borrowers cannot do is get that rate guaranteed over the phone. The quoted rate cannot be locked based upon a phone conversation or a standard prequalification.

One of the initial disclosures borrowers receive when first submitting a completed loan application is an Interest Rate Lock Disclosure. These disclosures can vary somewhat from one lender to the next but they all spell out the very same thing- when you can lock in your rate. Most lenders for example won’t allow anyone to lock in a rate unless the loan application is considered complete. One of the factors that define a complete application is a property address. When someone is shopping around for a home with a preapproval letter in hand, the interest rate on the desired loan is dynamic and can change from day to day. Until there’s a property address, the rate is still floating with the market.

Interest rate locks will also vary based upon the time needed to close a loan. If for example a new sales contract is signed and the closing date is 30 days away, a 30 day lock will be needed. If the closing is further out then maybe a 45 or 60 day lock will work. The longer the lock term, the more expensive the rate can be. A 60 day lock might cost the borrowers another 0.25% in point compared to a 30 day lock. On a $200,000 loan, a 0.25% point is $500. In addition, a 15 day lock would be less expensive than a 30 day lock.

Finally, know that lenders take locks just as seriously as you do. When lenders lock in a loan, they set aside the funds needed for your new mortgage and commit that loan for sale based upon the price that day. If you lock a loan at 4.50% for 30 days, the lender reserves those funds for you and prices the loan based upon current market conditions. If rates go up, you’re protected because of your lock. If rates go down after you’ve locked, well, that’s what you locked in at.

There are those that will adjust your rate lower if interest rates have dropped quite a bit from when you first locked but getting a “float down” when rates have fallen say 0.125%, you’re probably not going to get too much cooperation for lowering your rate. You can ask your loan officer about rate locking advice but experienced loan officers know that it’s a bad idea to advise clients on when to lock in a rate and leave that decision solely up to the borrower.

When you first receive your Rate Lock Disclosure, make sure you read it and understand it completely. There’s some important stuff in it.

Written by David Reed for Copyright © 2019 Realty Times All Rights Reserved. Reed is from Austin, Texas and is the author of The Real Estate Investor’s Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show.