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The Cost of Your Mortgage Loan
Locking-in the Rate
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When shopping for a mortgage, the lender may give
you a quote for the mortgage interest rate and
points (additional fees charged by the lender
usually paid at closing by the borrower). These only
represent terms available at the time of the quote.
They may not be available by the closing date (which
may be weeks or months in the future). To ensure the
rate and points are the same at closing as they are
when quoted, you'll need to lock-in the interest
rate (also known as a rate lock or rate commitment).
Floating the Rate
Buyers opt to float the loan when they believe
interest rates will drop after their loan
application date and prior to closing. The risk is
that rather than dropping, interest rates rise,
increasing the mortgage payment.
Obtain a Written Agreement
Most lenders will commit, in writing, to a mortgage
interest rate for a specified time period while your
loan application is processed - this is known as
"locking-in" the rate.
If you elect to lock-in an interest rate, it is best
to deal with a lender who provides a written lock-in
agreement. Be sure to read this agreement carefully,
some lock-in agreements become void due to actions
beyond your control - such as a change in the
maximum rate for VA-guaranteed loans.
Lock-in Options
The following lock-in options are common among
lending institutions. Be sure to ask the mortgage
lenders you are considering which lock-in options
they offer.
-
Lock-in interest rates and
points.
This will give you a clear understanding of how
much your mortgage will cost. Neither your
interest rate nor points increase during the
lock-in period. This protects you against rising
market conditions.
-
Lock-in interest rates and
floating points.
Your interest rate is locked-in and will not
change for the lock-in period, while your points
may rise and fall with market conditions. With
this option, your lender may allow you to
lock-in the points at the current market
condition some time between submitting the loan
application and closing.
-
Floating interest rates and
floating points.
This gives you the option to lock-in the
interest rate at some time between submitting
the loan application and closing. This puts you
at risk if interest rates and points rise and
may not be best for a homebuyer with a tight
budget.
The Cost of Locking-in the Rate
It is not unusual for a lender to charge a fee for
locking-in an interest rate and points. This fee may
vary depending on the amount of time you want to
lock-in the rate (the lock-in period).
The fee may be charged when you lock-in the rate
(and is rarely refundable if you withdraw your
application, if your credit is denied or if you do
not close on the loan) or it may be included in your
closing costs. The amount of the fee and when it is
charged will vary among lenders.
The Lock-in Period
Most lenders will offer lock-in periods of 30-60
days. Some lenders may only have short lock-in
periods. And still others may offer a longer lock-in
period (expect higher fees for longer lock-in
periods).
The lock-in period should be long enough for the
loan approval process and to allow for any other
contingencies that may delay closing.
The Lock-in Expiration Date
If unexpected circumstances prevent the loan from
settling prior to the last day of the lock-in period
(whether caused by you or others in the process -
including the lender), you lose the interest rate
and points that were locked. Prevailing interest
rates and points are usually charged under these
circumstances. Be sure to ask your lender before you
lock-in what interest rates and points will be
charged if the loan is not closed before the lock-in
period expires.
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