Get a Firm Grip on Your Rate by Getting it in Writing
That’s why lenders will allow you to choose between two rate options when you make an application for a mortgage. You can “float” your rate, which means you are gambling that when you close, the current mortgage rate will be equal to or less than the rate at the time you made the loan application. The other alternative is to “lock in” your rate, guaranteeing that you get the rate you have locked in, regardless of whether or not rates go up or down. Given the current fluctuations in the economy, locking in rates is a way to compensate for the uncertainty.
If you decide to opt for a lock in, it means that you have a binding commitment from your lender that for a specific period of time, usually between 30 to 60 days, you are going to receive the rate that was current at the time you begin the loan process.
Keep in mind that there are different kinds of lock-ins:
- Locked-in interest rate and locked-in points
- Locked-in interest rate with floating points
Floating interest rate with floating points – This option gives the borrower the opportunity to lock-in rates and points at any time between the start of the application and the actual closing.
Your lock in agreement should be written down, detailing the specific terms and conditions of the lender’s commitment. If your lender insists that a verbal commitment is sufficient, you should look for another lender. This is extremely important because if your lender reneges on the commitment, and all you have is an oral agreement, it will probably not be enough to prove your case if you were to file a lawsuit. Besides, lawsuits are expensive and time consuming, so it’s a good idea to lessen your risk of having to file one with a written agreement.
In addition to the question of floating or locking in rates, you should consider rate activity when deciding on the type of mortgage for which you will apply. Adjustable rate mortgages usually have very appealing introductory rates; however, you may find that the low initial rate is replaced by a much higher one when your rate adjusts. Depending on how rates are behaving at the time you apply, a fixed rate mortgage may be the better choice.
Locking in a rate and choosing the right mortgage product should decrease some of the risk associated with getting a loan. The key is to do your homework, and shop around to find the best rates and terms that meet the needs of your individual financial situation.
Expiration of Lock-ins
From the Federal Reserve Board, here are some questions to ask your lender about the expiration feature of lock-ins:
- What rate will be charged if the lock-in expires before settlement-the rate in effect when the lock-in expires?
- If you don’t settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?
- If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration, will the lender charge an additional fee for the second lock-in?
To get more information about lock-ins, log on to the Federal Reserve Board’s Web site.