Chances are, when you initially started talking with a loan officer about a mortgage, they most likely explained to you that interest rates couldn't be guaranteed until you locked in your interest rate on your loan. Hopefully, your loan officer also told you that you needed to tell them when to lock your loan. A good loan officer will know what interest rate you want and will keep you informed about what rates are doing and when it is time to lock your interest rate.
How Do I Lock My Rate?
Mortgage interest rates change daily, sometimes more than once a day. Because of changing interest rates you and your loan officer need to work very closely together to make sure that you get your interest rate locked at the rate that you want. You cannot assume that you are getting a particular interest rate that a loan officer gave you over the phone until you tell your loan officer to lock your rate.
Many companies require that you sign a piece of paper called a Lock In Agreement or a Interest Rate Lock Agreement or some other version of this name. Sometimes the company you are working with might even ask you to pay an interest rate lock in fee. Keep reading and you'll understand why rate locks are not only important to you, but to your loan officer and their company.
Often, the Lock In Agreement is included with the loan package that your loan officer sends you at the beginning of your loan qualification process. Once signed and sent back to the loan officer they'll hold on to it until you tell them to lock your loan. When you say Lock My Loan they'll either fax in your rate lock request, or send it in electronically.
What Is A Rate Lock?
A rate lock is a written or electronic communication your loan officer makes on your behalf to the particular mortgage lender where you are going to get your loan. This communication tells the lender that you intend to borrow some amount of money at some particular interest rate and that you will be borrowing it within a particular time frame. For example, you may lock in an interest rate of 6.5% borrowing $250,000 and expect to need the money in 30 days.
When you and your loan officer tell your lender this, your lender essentially earmarks that particular amount of money at that particular interest rate. The lender, in a sense, makes a bet or a hedge on you, and your loan officer, getting your loan completed by when you said you wanted it. The lender in turn tells their investors to set aside their money for your loan.
If your loan does not go through as planned this could cost the investors, and the lender money - just like they placed a bet and lost. If your loan officer locks a lot of loans and doesn't close many of them, their company could get penalized by their lenders - maybe even to the point of not being able to lock loans anymore.
With this in mind, your loan officer takes locking a loan seriously. Chances are, they will not lock a loan for you unless they have gotten your credit, your financial documents, your signed loan documents, and have at least ran your loan through a preliminary underwriting process to make sure that your loan is a good loan. To be even more sure, your loan officer might even require that they have the appraisal from your home too.
Typical Interest Rate Locks Are 30 Days Or Longer
Typically, rate locks are for at least 30 days if not longer. You always want to give yourself the longest time possible to close your loan to allow for underwriting time, time to get new information if the underwriter wants it, and other unforseen delays in getting your loan approved.
If you are writing a purchase contract on a home, you will want to keep in mind your interest rate lock. Always remember to and try to give yourself at least 30 days to get your mortgage on the sales contract. Make sure that you talk to your real estate agent about this as you write your purchase offer. In some real estate markets where you have little negotiating room with home sellers sometimes you'll have to take a shorter time period to get your mortgage put together. When this happens you just need to know that you have to move fast with your mortgage company.
No Interest Rate Guarantees Until Your Rate Is Locked
If you have a loan officer guarantee that rates will do something over night you should put your radar up. It is impossible for anyone to know to the point of guaranteeing what rates will do over night, let alone in the next hour. We can get a pretty good idea, but never definitive.
On this same note, you also want to be a little wary of loan officers who say not to worry about rates because they guarantee rates. You could be in for some trouble near the end of your loan process if you are under a timeline and have to get your loan done. There are many bait and switch techniques that can get unknowing borrowers backed into a corner where they have to take a higher interest rate or pay more fees than originally planned. Fortunately, a lot of this hanky panky has been weeded out of the industry over the past year, but some folks still practice these black hat selling techniques.
Unlocked loans in a loan officer's pipeline is where a lot of loan officers lose sleep. Until your mortgage interest rate is locked your loan officer has less confidence in your loan getting approved because interest rates could all of a sudden go up. With higher interest rates comes higher mortgage payments which means your debt to income ratio - a key factor in qualifying for a loan - could go up and knock your loan out of being approved. An unlocked loan can also indicate to a loan officer a noncommitted customer.
This about covers what is a rate lock and how do you lock the interest rate on your new mortgage. If you have any questions, make sure that you ask your loan officer up front what their lock in policies are. You'll want to know this right away so that you keep yourself free of bait and switch surprises later. You also want to stay in tune with interest rates and the lock procedure so you can lock your loan in a hurry if you see a rate that you want. And the last thought here is that no interest rate is safe until it is locked, and even then it is not safe unless you close your loan on time.
