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August 12th, 2011

5 golden rules to understanding your interest rate lock

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int rate lockIt has been one wild week in the mortgage world. Mortgage rates set record 2011 lows this week, bringing new refinance opportunities and increased purchasing power to many.

As we famously say, “More people get burned trying to time the bottom of the mortgage market than the top of the stock market.”

So if any of you out there are still hesitating on locking in your mortgage rate, do so quickly because these record-low mortgage rates won’t last long (rates rise a lot faster than they fall).

To help everyone gain a better understanding of how and when to lock in a mortgage rate, I asked mortgage broker Kevin Ungar, of Apple Mortgage Corp in New York, to explain the intricacies of a mortgage rate lock.

Here is Kevin’s article (specially written for blog.HSH.com):

 

The 5 golden rules to understanding your interest rate lock

The process of buying a home can be an arduous one.  The buyer’s mind gets cluttered with so many things–contracts, W-2s, pay stubs, title insurance, closing costs, movers, etc. 

Today, I want to talk about what many consider the most important part of the homebuying process: the interest rate.

When and how does a borrower lock the rate?

What are the important factors that will help someone decide when to lock?  

For the loan officer, the act of locking the interest rate is simple and straightforward. In most cases, a couple of keystrokes on the computer and it’s done. 

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But the more relevant question is how the loan officer and the borrower arrived at the decision to lock the rate.

It is here where the loan office proves his or her value by helping the borrower make the right decision. After all, this is the largest purchase most people will make in their entire lives. The slightest change in rates translates into thousands of dollars over the life of the loan. 

Here are the 5 golden rules that you must understand when discussing rate locks:

1. NEVER lock a rate before the contract is signed

2. Know what your “on or about” closing day is

3. Most lenders offer 15, 30, 45 and 60 day rate locks

4. Choose a lock period that gives you the comfort of knowing you should have enough time to get you through closing

5. 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 go hand in hand and they are the lynchpin of the interest rate lock discussion.

The “on or about” closing day is typically anywhere from 30-60 days from the signing of the contract. Firstly, take note of what that date is and then call your attorney to discuss whether he/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 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 mentioned before. 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 people 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 go over every scenario to educate and inform, so you can make the right decision. It’s worth a lot–literally and figuratively.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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