The following article was contributed by Kevin Ungar, a mortgage broker in New York.
The process of buying a home can be an arduous one. The homebuyer’s mind gets cluttered with so many things--contracts, W-2s, pay stubs, title insurance, closing costs, movers, etc.
Today, I want to talk to you about what many consider to be the most important part of the homebuying process: the interest rate.
When and how do you, the borrower, lock in the interest rate?
What important factors will help you decide when to lock?
For the loan officer, the act of locking in the interest rate is simple and straightforward. In most cases, a couple of keystrokes on the computer and its done.
But the more relevant question is how the loan officer and the borrower arrived at the decision to lock in the rate. It is here where the loan office proves his or her value by helping you make the right decision. After all, this is the largest purchase most of you will ever make. The slightest change in interest rates translates into thousands of dollars over the life of the loan.
Here are the 5 golden rules of your interest rate lock:
- Never lock in a rate before the contract is signed.
- Know what your “on or about” closing day is.
- Most mortgage lenders offer 15, 30, 45 and 60-day rate locks.
- Choose a lock period that gives you the comfort of knowing you have enough time to get through closing.
- The interest rate is not locked at the time of submission to the bank. The borrower chooses when that happens.
Rules 1, 2 and 3
Rules 1, 2 and 3 go hand-in-hand and they are the lynchpin of the lock discussion.
The “on or about” closing day is typically anywhere from 30 to 60 days from the signing of the contract. First, take note of what that date is, and then call your attorney to discuss whether he or she thinks the date is fairly accurate.
Sometimes, circumstances with the borrower or the seller can change that expected date, and its common practice that either side can take up to 30 days past that date to close. If you are fairly certain that you won’t close for 60 days, 15, 30 or 45-day locks are useless. If your rate lock expires before closing, you may be subject to expensive extension fees, or worse, your interest rate could go up.
Rule 4 is pretty self explanatory.
When locking, it’s always my advice that the borrower try to build a cushion into the lock to account for those possible delays that I just mentioned. So, if you are fairly sure you will close within 45 days, I typically recommend a 60-day lock.
The borrower needs to know that shorter-term locks tend to have a slightly lower rate than the longer-term ones. Although the shorter-term locks are tempting, be careful because some borrowers say, “I want to wait to lock until I am within 15 or 30 days of closing, this way I can benefit from the lower rate.
Oh, if it were only that simple. Since rates are dynamic and constantly changing, the borrower may wait and rates could climb.
Rule 5 is last but certainly not least. Many borrowers are under the false impression that the rate is locked upon submission to the bank. This is not true for most lenders. The borrower has the power to decide when to lock, and it is critical that the loan officer goes over every scenario to educate and inform you so you can make the right decision.
It's worth a lot--literally and figuratively.
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