What rate will you get at closing

Other than ARM teasers, mortgage assumptions, and seller financing, few lenders guarantee their rate quotes. The rate you get is set on (or near) the date you close. If you dislike such uncertainty, you can lock a rate. After you submit your application, you decide whether to float or lock. If you choose to lock, that opens this set of questions:

  • When to lock: Generally, you can lock on the date of loan approval— or as early as the date of application—or anytime up until a day or two before closing.
  • How long: Lock periods may run anywhere from 10 to 90 days, or longer if you arrange permanent financing for a new property before the builder completes construction.
  • How much: The longer you lock your rate, the more the lock will cost you (or the lender). Although some lenders try to collect this fee up front, industry standards favor payment at closing.

Whether to Lock?

To help answer this question, return to the issue of qualifying ratios. If, during the loan processing period, rates move up .25 percent, would the lender still qualify you for the amount you need? If no, lock immediately. Why risk losing your loan or having to scurry around at the last minute to reconfigure your qualifying income and qualifying debts? If, however, you've plenty of extra cash to reduce the amount of your loan, then you might accept the risk as long as higher monthly payments would not wreck your monthly budget.

Most people who dislike risk prefer to lock, even if upward rate moves wouldn't upset their budget or disqualify them from the mortgage for which they've been approved. If you fall into this category, lock and sleep well. Of course, the downside occurs when rates drop and you kick yourself for worrying so much.

When to Lock

Even if you decide to lock, most lenders give leeway. Should rates drop the day you receive your loan approval, you might wait to see if drops continue. Ride the trend down and then lock after the next couple of upticks.

Obviously, the rate lock issue prompts you to forecast short-term interest rates. And anyone who perfects this skill can make millions as a bond trader, so don't expect flawless timing. Follow the rates, and act when you feel comfortable in the trade-offs among opportunity, risk, and regret.

How Long Should You Lock?

Are you counting on a 30-day closing or less? Are you already a week or two forward in the mortgage process? Does your loan approval depend on explanations, inspections, appraisal, or documentation? If so, how much time must you or the lender allow to remove these contingencies? Have you verified, corrected, and cleaned up your credit reports prior to applying for the loan (Secret #44)? Before you choose a lock period, realistically review what needs to be done and how long it will take.

Many borrowers lock too soon and for too short a period because they ballpark their closing date and fail to avoid glitches. As you saw earlier, when interest rates trend up, don't push against the timeline. To break your lock, the lender may delay closing. Without your rate guarantee, the lender can move you into a the then higher market rate.

How Much Do Rate Locks Cost?

The longer you lock, the more you pay. On a $200,000 loan, a 30-day lock could cost between $500 and $1,000. A 60-day lock could run up to $1,500 or more. Your lender may, for little or no charge, lock for 15 to 30 days. (Check whether your state regulates rate locks.)

Although longer term rate-lock fees shift up and down, they're seldom cheap. So, typically, you wouldn't add an extra 30 days "just to play it safe." Smart borrowers ride trends down, prepare to avoid glitches and contingencies, develop a realistic closing schedule, and lock a rate for the minimum number of days that safely protects until closing.

Market Floats Down

You could lock at a rate, say 6.5 percent and then rates fall. When that happens, will you enjoy the lower rate? Probably not, unless your lender has agreed to a rate lock with a float down.

Without a float down agreement, can you negotiate a lower rate? Sometimes, but your lender may have presold your 6.5 percent mortgage to an investor in the secondary mortgage market. That investor expects a 6.5 percent loan. If your lender delivers a 6.0 percent loan instead, it will lose money because the investor will discount the price it pays so that it still earns the 6.5 percent it bargained for. If you want a rate lock with a float down, negotiate for it early on.

Find a New Lender

If your lender did not agree to a rate lock with float down, you could possibly grab the new 6.0 percent market interest rate by jumping to a new lender. To quickly move forward with the new lender, the old lender must be willing to immediately transfer your application file. The new lender must agree to accept the file and close within 15 days. Otherwise, you must buy another rate lock, unless disinflation and weak economic growth signal further drops in interest rates, and you think floating presents an acceptable risk.

You would likely forfeit the application fees and costs you paid to the first lender, as well as pay additional application fees and costs to the new lender. Changing lenders halfway through the mortgage process seldom proves easy. Nevertheless, you might tactfully raise the possibility to your loan rep. The rep might at least give you some rate break. So, don't leave your float down to last minute negotiations. Ask for it before you need it.

If dealing with a mortgage broker, that rep might be willing to move your file to another of his wholesale lenders. Of course, a broker who pulls that tactic too often will find fewer lenders who will accept applications from his loan customers. Good mortgage brokers play fair with their lenders and their borrowers.

With refis, however, you hold more power because no sales contract imposes a closing deadline. Also, under federal law, you may rescind your refinance agreement within three business days after you close that refi.

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