To
begin, a rate lock should not be confused with a loan commitment. A loan commitment
is the lender's promise to loan you a specified amount sometime in the future.
A rate lock is a contract in addition to the loan stating that the lender will
hold a certain interest rate for a specified period of time, usually about 30
days. The downfall is, if rates fall during that time, you will have to pay additional
costs to take advantage of the lower rate. Also, if closing is delayed and financing
is not completed during the rate lock's specified time period, you will be refinancing
at the current rate. If rates fell during the rate lock period, this would be
to your advantage. However, if rates had risen, you would have to refinance at
the new, higher rate, something you were trying to avoid by using a rate lock
in the first place.
The
cost of a rate lock runs about 1/8 percent to 3/8 percent of the loan amount and
may come in the form of a flat fee, percentage of the mortgage, or a slightly
higher interest rate. When searching for the best interest rates and closing costs,
you also may want to look for the best rate lock you can find.
Probably
the most important aspect of getting the most out of a rate lock is determining
its duration. For example, assume you are refinancing and interest rates have
dropped to a level at which you would like to lock in. Once you have chosen a
lender, ask that he or she estimate the time it will take to process your loan.
If possible, get the estimate in writing. Also estimate how long it will take
for you to submit all of your paperwork. Anticipate all possible delays. This
is especially important when purchasing a new house. Construction delays can push
the closing past the rate lock expiration date. Keep in mind that during times
of low rates, many people will be getting mortgage loans. Banks, appraisers, title-search
companies, mortgage brokers, and anyone else involved in the process will be very
busy. Any delay by one may slow the entire process. With all of that in mind,
decide how long you would like to lock in, between 15 and 60 days is most common.
The longer the period of time the higher the cost of the rate lock.
Lastly, obtain a legal, written contract of your rate lock and keep a copy for
yourself. Do not accept verbal promises. The contract should state your name,
date of the agreement, the starting and expiration dates, options available after
the expiration date, cost of the rate lock, and most importantly the interest
rate, closing costs, and any other loan features you are locking in. Rate locks
can be instrumental to refinancing or securing a loan on a new home when aptly
planned.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
