A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
Rate Lock Period
In most cases, the terms you are quoted when you shop among lenders only represent the terms available to borrowers for a very short period of time who are 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, be careful when shopping for mortgage quotes, as the statement, “my best rate available today…” may be quite different in meaningful benefit to you, than a mortgage quote from a lender that can be locked in for 30-days.
What Is 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 a certain number of points for you for a specified period of time, while your loan application is processed. (Points are additional charges imposed by the lender that are usually prepaid by the consumer at settlement but can sometimes be financed by adding them to the mortgage amount. One point equals one percent of the loan amount.) Depending upon the lender, you may be able to lock in the interest rate and number 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 provided 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.It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender’s commitment only after your loan application has been approved. This commitment usually will state the loan terms that have been approved (including loan amount), how long the commitment is valid, and the lender’s conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender.
Will Your Lock-In Be In Writing?
All lenders have government regulated Good Faith Estimate forms (GFE’s) that set out the exact terms of the lock-in rate agreement. This form must be provided to you in writing within three days of locking your loan interest rate and other origination charges.If a lender is offering you a verbal lock-in agreement, seek different advice from a professional loan officer with a proven track record who can protect your interest and ensure you are treated fairly.
Will You Be Charged for a Lock-In?
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. Ask question up front to ensure you understand the terms of your rate lock.
How Long Are Lock-Ins Valid?
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 close on the loan within that time period. Lock-in periods of 30 to 60 days are common. But some lenders may offer a lock-in for only a short period of time (for example, 7 days after your loan is approved, while sending your loan documents to title) while others offer longer lock-ins (up to 120 days) for new construction purposes. Lenders typically charge a higher fee for the longer lock-in period. Usually, the longer the period, the greater the charge or fee.The lock-in period should be long enough to allow for settlement, and any other contingencies imposed by the lender, before the lock-in expires. Before deciding on the length of the lock-in to ask for, you should find out the average time for processing loans 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. Add some contingency time, just in case unexpected delays occur.
What Happens If the Lock-in Period Expires?
If you don’t close your loan within the lock-in period, you might lose the interest rate and points you had locked in. This could happen if there are delays in processing or closing 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 newer 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. Some mortgage companies will permit you to extend the loan for a few days for a small fee, but that offer is entirely up to the secondary market condition at the time. Working with a strong, nimble, and reputable lender is always the best course of action.
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