In the mortgage finance world mortgage lenders and mortgage brokers work off interest rates on a daily basis. Interest rates change very frequently, sometimes upwards of several times daily. Most mortgage companies have their eye on what’s happening with rates and can advise you on making the appropriate choice whether to lock in or whether to float your interest rate on the mortgage loan you are taking out.
Here’s how interest rate locks work no matter what mortgage company you are working with.
*Remember the longer interest rate lock the costlier it becomes.
The reason is simple-there is always risk of interest rates changing and the lender doesn’t want to lose money and neither should you. If a lender locks you in today at 4% and rates go to 5% the lender loses money. The lender loses money because they make more on selling a 5% rate than a 4% rate simple enough right?
15 day lock
This rate lock especially lately has provided the best possible interest rate bar none. The shorter the lock the better and lower cost the rate is to you. The 15 day loan lock is used to lock your rate right before final loan documents are drawn. This means the loan has already been underwritten and the property has already been appraised and you are nearly finished. Using this lock means that you float your loan throughout the loan process.
30 day lock
The most common lock time frame is for 30 days. The 30 day lock usually happens at the beginning of the loan process and is usually a little more expensive than the 15 day lock. Using this type of lock, prevents you from being in a floating position during your loan process. It gives you a safety net if you will, of what your payment is going to be right upfront so there are no changes.
45 day lock
Now the costs of the mortgage began to rise. The 40 5k mark is used in a 45 day escrow. Or if you need an extra 15 days to close escrow such as a purchase loan transaction or a short sale situation where more time is needed to close escrow. Like the 30 day loan lock, this program gives you the total payment right up front with a guaranteed lock in interest rate for the first 45 days of the contract or escrow.
60 day loan lock
This lock time friend has the highest cost premium built into it because now the lender is starting to take real long term risk on your loan. Let’s clarify one thing: the lender is taking the risk on potentially losing money not you. This loan lock is used if your loan origination process begins in one month and have to close at the end of the following month such as in an FHA streamline refinance scenario.
Most lenders don’t provide longer than 60 day loan locks. Some lenders offer a 75 day loan lock however it’s very unpopular due to the inherent cost. Most of the time people can lock in their mortgage interest rate for 30 days safely and comfortably and feel confident their loan will close within 30 days.
*Note if it is standard procedure with your mortgage lender to lock for 45 days or longer, turn around and run, even SPRINT!
That is sign the lender or mortgage broker is slow. You cannot afford to be working with a slow mortgage company in this interest rate environment. Most of the time the big banks and even local credit unions are the ones that take 45 days or longer to close escrow. That is simply too of an escrow unless you absolutely need the extra 15 or 30 days.
Most interest rate locks allow for flexibility during loan transactions.
This is a tight credit market, that’s a given. Sometimes things happen during the loan process that are unexpected. Just make sure the lender that you select to handle your financing or the local mortgage broker can handle your interest rate lock should such a scenario present itself.
Maybe you are relying on somebody else to get you a financial document and may take a couple of days and as a result, you have to extend your interest rate lock. It happens. Get your rate lock extended by letting your lender know what’s going on so they can preserve the integrity of the interest rate.
The locking of the interest rate in the mortgage loan transaction is the point at which you solidify that you are happy working with the mortgage company and loan program of your choice. Have a conversation with the mortgage professional upfront about how their interest rate locks work. When getting a mortgage rate quote ask them what kind of interest rate lock is that based on? Do your homework. Make smart choices about the mortgage company and of course about the interest rate lock.
Start your interest rate lock by getting a mortgage rate quote. Let’s discuss how mortgage interest rate locks work for your unique loan scenario.
RELATED MORTGAGE ADVICE FROM SCOTT SHELDON
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