Thursday, March 31, 2011

Locking Your Interest Rate

What is a Rate Lock?
  • When a loan originator (loan officer) locks the interest rate for a home loan, they are making a commitment to deliver that loan to the lender.
  • When the interest rate is locked, it cannot go higher or lower until the rate lock expires.
Do You Have to Lock the Interest Rate?
  • Yes, the interest rate MUST be locked before the lender can issue the final loan approval.
  • Here’s why: if the rate is not locked, it could go higher, and the borrower may no longer qualify for the loan.
  • Most lenders require the interest rate to be locked at least 10 days before the closing.
Are All Rate Locks the Same?
  • No, they are not! An interest rate is locked for a certain number of days – usually in 15-day increments (15 days, 30 days, 45 days, etc.).
  • If the rate is not locked through the closing date, then the lock could expire before the loan closes.
  • The rate quote the lender gives you should be for a rate lock that extends through the closing date.
Float-Down Locks
  • Some lenders offer “float-down” locks, meaning the interest rate can go lower if the market interest rates go lower. It still cannot go higher.
  • Float-down locks are a bad idea, because the lender ALWAYS charges you a higher interest rate to begin with.
What Happens if the Lock Expires?
  • The lender can always extend the rate lock, but it usually will cost the borrower some money. It can cost hundreds (or thousands) of dollars to extend a lock.
  • ALWAYS make sure your interest rate is locked through the closing date!
When Can You Lock the Interest Rate?
  • For a purchase transaction, you can lock the rate as soon as you have a fully-executed sales contract (both the buyer and seller have signed it).
  • For a refinance transaction, you can lock the rate as soon as the loan application is completed.
How Do You Know the Rate is Locked?
  • Colorado law requires the loan originator to give you a rate lock disclosure within 3 days of completing the loan application.
  • If the rate is not locked at that time, the disclosure must say the rate is not locked.
  • Once the rate is locked, the loan originator must give you a new disclosure saying that the rate is locked.
  • No lender is exempt from this law in Colorado.
How Do You Lock the Rate?
  • The lender locks it for you.
  • All you have to do is tell your lender to lock your interest rate. It takes the lender about 30 seconds to lock the rate.
  • You should never pay for a rate lock. It does not cost the lender anything to lock the interest rate.
When Should You Lock the Rate?
  • As soon as you can!
  • Rates can always go lower, but they can also always go higher. You are just gambling if you don’t lock the interest rate. You do not want to gamble with your mortgage.
How Do You Know if Rates Will Go Up or Down?
  • You cannot possibly know if rates are going to go up or down. No one knows if rates are going to go up or down.
  • Interest rates depend on how the mortgage-backed securities bond market is trading.
  • If someone knew where rates were going, they would not be selling mortgages, or dispensing advice about interest rates. They would be making billions of dollars a week trading bonds on Wall Street.
  • NEVER trust anyone who tells you they know where interest rates are going! They are making it up.

Want to watch a video of this tip?  Check it out on our web site:

Want to make sure your loan closes?  Call The Mortgage Experts at 303-345-3683.

No comments: