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Locking Your Rate

Most consumers know that the interest rates available for mortgage loans are subject to change, based on economic conditions. However, what many consumers do not recognize is the rates on most loan products are subject to change on a daily basis.

Understanding that mortgage rates can change on a daily basis is important when shopping for a loan.. But once you have identified the lender with the best price, it is equally important that you have the opportunity to “lock” the pricing on the loan so you truly get that best deal. 

For those loan products that are subject to daily price changes, most lenders will give you the option of either "locking" or "floating". Locking (also known as a “rate lock” or “rate commitment”) is a lender’s agreement to hold a specified interest rate and discount points (if applicable) for a specific period of time while the loan is being processed. Floating means that the interest rate and discount points are not established, but will be locked at a later date.  When you lock, the lender should provide you with a written document confirming the terms of your lock.

Some lenders will allow you to lock the loan’s pricing at the time you make loan application, and some lenders will only allow you to lock after you have been pre-approved for the loan. Having to wait for a pre-approval is not necessarily a negative – it allows the lender the opportunity to properly “grade” your loan in order to provide you an accurate price. However, you should inquire as to the length of time it will take the lender to provide the pre-approval – remember, interest rates can change daily. 

Most lenders offer lock periods from 15 days to 60 days. Lock periods as long as 120 days are available from some lenders. These longer lock periods could prove useful if the loan is for a home that is under construction.

It is important to understand that the longer the lock period, the more expensive the loan. Although the difference in price between a 30 day lock and a 60 day lock is relatively small, the difference between a 30 day lock and a 120 day lock could be as much as 1/4% in the loan’s interest rate. In addition, lock periods longer than 120 days generally require the payment of an up-front fee.

To avoid this additional cost of a longer lock period, some consumers will “float” until they get closer to the time of loan closing and then lock the pricing. However, this strategy must be considered in conjunction with the fact that interest rates can change dramatically over a short period of time.  It is not unusual for mortgage rates to increase or decrease as much as ¼% within a one-week period.

The lock period selected must be of sufficient length to handle the time it will take to close the transaction.  It is worthless to lock a great deal on a loan if the loan cannot be closed within the lock period. Ask the lender how much time it will need to have your loan ready to close. Any competent lender should be able to have most loan applications ready to close in 30 days. If you are buying a home, the lock period should be long enough to cover the closing date set forth in the sales contract. 

For certain types of loans the interest rates change infrequently - once a week or once a month. For these types of loans you usually will not have the option of locking or floating. Instead the pricing is usually automatically locked for some period of time (usually 30 days) when the lender receives preliminary loan approval.

There are pros and cons to entering into a rate lock. A rate lock is advantageous in times of rising rates, but will not allow you to benefit should interest rates fall. If interest rates increase and you have not locked in the rate, the increase in the mortgage payment due to the higher rates may mean you can no longer qualify for the loan.

It is important to remember that a rate lock is the lender’s promise to hold a specific rate and discount points. It is not a loan approval, and normal processing and underwriting procedures will have to take place before an approval is issued. Also, the typical rate lock provided by most lenders only sets the interest rate and discount points – all the other Closing Costs are subject to change. 

For all of Reed Mortgage’s loans that are subject to daily price changes:

ü       At the time of loan application you have the option of either locking or floating the pricing on your loan.

ü       If you elect to float, you may lock your pricing anytime during the loan process, up to 10 days before the loan closing.

ü       We offer lock periods from 15 days to 120 days.

ü       There is no up-front fee if your lock period is 60 days or less.

ü       When you lock your loan, we provide a written agreement confirming the lock-in.

ü       We have 99% of our loans ready to close in 30 days or less.

 

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