When you're looking for a
mortgage, you're likely to shop among lenders for the
most favorable interest rate, and the lowest points and
other up-front charges. When you find the
most favorable terms and the lender that you want,
you'll apply to that lender. But
when you get to settlement, will you actually receive the terms you
applied or bargained for? Or will you find that the rate has changed
- and that your costs have gone up? Lock-ins on rates and points
might offer you a way to ensure that what you shop for is what you
get. This page explains what these arrangements mean.
In most cases, the terms
you are quoted when you shop among lenders only
represent the terms available to borrowers settling
their loan agreement at the time of the quote. The quoted
terms may not be the terms available to you at settlement weeks or
even months later; therefore, you could not rely on the terms quoted
to you when shopping for a loan useless a lender is willing to offer
a lock-in.
A lock-in, also called a rate-lock or rate commitment, is
a lender's promise to hold a certain interest rate and points for
you, usually for a specified period of time, while your loan
application is processed. (Points are additional charges imposed by
the lender that are usually pre-paid by the consumer at settlement
but can sometimes be financed by adding them to the mortgage amount.
One point equals 1 percent of the loan amount.)
Depending upon the lender, you may be able to lock in
the interest rate and n umber of points that you will be
charged when you file your application, during
processing of the loan, when the loan is approved, or
later.
A lock-in that is given
when you apply for a loan may be useful because it's
likely to take your lender several weeks or longer to
prepare, document, and evaluate your loan application.
During that time, the cost of your mortgage may change.
But if your interest rate and points are locked in, you
should be protected against increases while your
application is processed. This protection
could affect whether you can afford the mortgage.
However, a locked-in rate could also prevent you from
taking advantage of price decreases, unless your lender
is willing to lock in a lower rate that becomes
available during this period. It is
important to recognize that a lock-in is not the same as a loan
commitment, although some loan commitments may contain making the
loan such as receipt of a satisfactory title insurance policy
protecting the lender.
Some lenders have
pre-printed forms that set out the exact terms of the
lock-in agreement. Others may only make an
oral lock-in on the telephone or at the time of
application. Oral agreements can
be very difficult to prove in the event of a dispute. Some
lenders' lock-in forms may contain crucial information
that is difficult to understand or that is in fine
print. For example, some lock-in agreements
may become void through some unrelated action such as a
change in the maximum rate for Veterans
Administration-guaranteed loans. Thus, it is
wise to obtain a blank copy of a lender's lock-in form
to read carefully before you apply for a loan.
If possible, show the lock-in form to a lawyer or real
estate professional.
It is wise to obtain
written, rather than verbal, lock-in agreements to make
sure that you fully understand how your lender's
lock-ins and loan commitments work and to have a
tangible record of your arrangements with the lender. This record may be useful in the
event of a dispute.
Lenders may charge you a fee for locking in the rate of
interest and number of points for your mortgage. Some lenders may
charge you a fee up-front, and may not refund it if you withdraw
your application, if your credit is denied, or if you do not close
the loan. Others might charge the fee at settlement.
The fee might be a flat fee, a percentage of the
mortgage amount, or a fraction of a percentage point
added to the rate you lock-in. The amount of the
fee and how it is charged will vary among lenders and may depend on
the length of the lock-in period.
Lenders may offer options in establishing the interest
rate and points that you will be charged, such as:
- Locked-in interest rate/locked-in points
Under this option, the lender lets you lock in both
the interest rate and points quoted to you.
This option may be considered to be a true lock-in
because your mortgage terms should not increase
above the interest rate and points that you've
agreed upon even if market conditions change.
- Locked-in interest rate/floating points
Under this option, the lender lets you lock in the
interest rate, while permitting or requiring the
points to rise and fall (float) with changes in
market conditions. If market interest
rates drop during the lock- in period, the points may also fall.
If they rise, the points may increase.
Even if you float your points, your lender may allow
you to lock in the points at some time before
settlement at whatever level is then current. (For
instance, say you've locked in a 10.5 percent interest rate, but
not the 3 points that went with that rate. A month later,
the market interest rate remains the same, but the
points the lender charges for that rate have dropped
to 2.5. With your lender's
agreement, you could then lock in the lower 2.5 points.)
If you float your points and market interest rates
increase by the time of settlement, the lender may
charge a greater number of points for a loan at the
rate you've locked in. In this case, the
benefit you might have has by locking in your rate
may be lost because you'll have to pay more in
up-front costs.
- Floating interest rate/floating points
Under this option, the lender lets you lock in the interest rate
and the points at some time after application but before
settlement. If you think that rates will remain level or even go
down, you may want to wait on locking in a particular rate and
points. If rates go up, you should expect to be charged the
higher rate. Because practices vary, you may want to ask
your lender whether there are other options
available to you.
Usually the lender will promise to hold a certain interest
rate and number of points for a given number of days, and to get
these terms you must settle on the loan within that time period. Lock-ins of 30-60 days are common. But some lenders may offer a
lock-in for only a short period of time (for example, seven days
after your loan is approved) while some others might offer longer
lock-ins (up to 120 days). Lenders that charge a lock-in fee may
charge a higher fee for the longer lock-in period. Usually,
the longer the period, the greater the fee.
The lock-in period should be long enough to allow for
settlement, and any other contingencies imposed by the lender,
before lock-in expires. Before deciding on the length of the lock-in
to ask for, you should find out the average time for processing loan
s in your area and ask your lender to estimate (in writing, if
possible) the time needed to process your loan. You'll also want to
take into account any factors that might delay your settlement. These may include delays that you can anticipate in providing
materials about your financial condition and, in case you are
purchasing a new house, unanticipated construction delays. Finally,
ask for a lock-in with as few contingencies as possible.
If you don't settle within the lock-in period, you might
lose the interest rate and the number of points you had locked-in. This could happen if there are delays in processing whether they are
caused by you, others involved in the settlement process, or the
lender. For example, your loan approval could be delayed if the
lender has to wait for any documents from you or from others such as
employers, appraisers, termite inspectors, builders, and individuals
selling the home. On occasion, lenders are themselves the cause of
processing delays, particularly when loan demand is heavy. This
sometimes happens when interest rates fall suddenly. If your lock-in
expires, most lenders will offer the loan based on the prevailing
interest rate and points. If market conditions have caused interest
rates to rise, most lenders will charge you more for your loan. One
reason why some lenders may be unable to offer the lock-in rate
after the period expires is that they can no longer sell the loan to
investors at the lock-in rate. (When lenders lock in loan terms for
borrowers, they often have an agreement with investors to buy these
loans based on the lock-in terms. That agreement may expire around
the same time that the lock-in expires and the lender may be unable
to afford to offer the same terms if market rates have increased.)
Lenders who intend to keep the loans they make may have more
flexibility in those cases where settlement is not reached before
the lock-in expires.
While the lender has the greatest role in how fast your
loan application is processed, there are certain things you can do
to speed up its approval. Try to find out what documentation
the lender will require from you.
Much of the information required by your lender can be
brought with you when you apply for a loan. This may help to get
your application moving more quickly through the process. When
you first meet with your lender, be sure to bring the
following documents .
- The purchase contract
for the house (if you don't have the contract, check
with your real estate agent or the seller).
- Your bank account
numbers, the address of your bank branch and your
latest bank statement, plus pay stubs , W-2 forms,
or other proof of employment and salary, to help the
lender check your finances.
- If you are
self-employed, balance sheets, tax returns for two
to three previous years, and other information about
your business.
- Information about
debts, including loan and credit card account
numbers and the names and addresses of your
creditors.
- Evidence of your
mortgage or rental payments, such as canceled
checks.
- Certificate of Eligibility from the Veterans
Administration if you want a VA-guaranteed loan. Your
lender may be able to help you obtain this.
Be sure to respond promptly to your lender's request for
information while your loan is being processed. It is also a good
idea to call the lender and real estate agent from time to time. By
calling occasionally, you can check on the status of your
application, and offer to help contact others such as employers who
may need to provide documents and other information for your loan. It is also helpful to keep notes on your contacts with the lender so
that you will have a record of your conversations.
When you're ready to settle on your loan, you'll want to
get the loan terms that you've locked in. To increase that
likelihood, it is important to learn as much as you can about what
the lender is promising you before you apply for a loan. Ask for the
following information when shopping for a loan:
Lock-Ins and Fees
- Does the lender offer a lock-in of the interest rate
and points?
- When will the lender let you lock in the interest
rate and points? When you apply? When the loan is approved?
- Will the lock-in be in
writing? If the lock-in is not in writing, you will
have no record of the lender's agreement with you in
case of a dispute.
- How long will the lock-in last (30, 60, 90, 120 or
more days)?
- Does the lender charge a fee to lock-in your interest
rate? Does the fee increase for longer lock-in periods? If so,
how much?
- If you have locked in a rate, and the lender's rate
drops, can you lock-in at the lower rate? Does the lender charge
you an additional fee to lock in the lower rate?
- Can you float your interest rate and points for now,
and lock them in later?
Loan Processing Time
- How long does the lender expect to take to process
your loan?
- What has been the lender's average time for
processing loans recently?
- Has the lender's loan
volume increased? Heavy volume might increase the
lender's average processing time.
Expiration 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?
-
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