A rate lock-in assures you that the mortgage interest rate and points you will be charged when you close your mortgage are the same as what you were quoted when you applied for your mortgage. Often, interest rates change while your mortgage is being processed. A rate lock-in gives you piece of mind.
Rate lock-ins are also called rate commitments. The lock-in is a promise by your lender to give you the same interest rates and points that you were quoted when you applied for your mortgage.
Interest rates go up, but interest rates also go down. If you've received a rate lock-in from your lender, and interest rates fall, you may be able to get your lender to lock in the lower interest rate for you.
The length of time that your rate lock-in is good for can vary from 30 to 60 to even 120 days. Many lenders charge a fee for rate lock-ins, and the fees will generally be greater for longer lock-in periods. The reason for the higher fees is that interest rates may increase substantially during long lock-in periods, thus reducing the lender's profit.
The fee you pay for a rate lock-in may not be refundable under certain circumstances. For example, if you decide not to go through with the mortgage, or if your loan is denied. Some lenders charge the rate-lock-in fee when you apply for your mortgage. Other lenders will charge the fee when you close your loan. The fees vary from flat fees, a percentage of the amount you're borrowing, or the fee may be added to the points you're paying on the mortgage.
You've no doubt heard the phrase "get it in writing" before. This is especially true when you're requesting a rate lock-in. Your lender may tell you that you're locked in, but later on change his mind. To save yourself time and trouble, get a blank copy of the lender's rate lock-in agreement and read it carefully. If you don't understand the agreement, have a lawyer or real estate professional read it for you. If the terms are acceptable, then have the lender put your rate lock-in in writing.
Your lender may offer you several options for rate lock-ins. For example, you can lock in both the interest rate as well as the points.
The lender may also offer you the option of locking in the interest rate, but allowing the points to "float." Under this scenario, if interest rates fall while your loan is being processed, the amount you pay in points at closing will be less. But, if interest rates rise, the points you pay would be higher, perhaps so much higher that the benefit of locking in your interest rate would be negated. Ask your mortgage lender if you can have the option of locking in the points sometime during the mortgage processing period. That way, if you see interest rates rising, you'll be able to make sure you're getting the full advantage of the rate lock-in.
Yet another option available is having both the interest rate and the points float while your loan is being processed, but you have the option of locking in the interest rate and points before the mortgage closing. This is a useful option if you think that mortgage rates may fall while your loan is being processed. It's also a little like gambling.
When you set the lock-in period, make sure you take into account the various factors that could affect the length of time it takes for your mortgage to be approved and your closing date set. There are many factors that affect the length of time required to process your mortgage.
If your lock-in period expires before you close on your mortgage, you may wind up paying a higher interest rate or higher points. While your lender may give you the same interest rate and points that were offered to you when you locked in, don't count on it.
Many of the factors that affect the length of time required for your mortgage to be approved are out of your control. But you can help speed up the approval process by giving your lender all of the information that the underwriters will need. Such information includes the purchase contract for the home you're buying, your bank account information (account numbers, address of the bank branch where you have your account, your latest bank statements), pay stubs, W-2 forms, and any other proof of income and employment.
If you're self-employed, give your lender as much information as possible: balance sheets, three years of tax returns, your payroll records, etc. Self-employed persons often have a harder time getting the best deals on mortgages, so it pays to prove to the underwriters that you're financially stable.
Also give the lender detailed information about your other debts, including loan and credit card account numbers, and the names and addresses of the creditors.
If your lender asks for more information, get that information as soon as possible. Also call your lender periodically to see how your loan is moving along, and to ask if there's any other information needed.
In times of fluctuating interest rates, a rate lock-in is the best way to get a good deal on a mortgage. Even if you don't get the best interest rate, you can be satisfied knowing that you didn't get the worst.
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