Questions to Ask Your Lender About Locking in a Rate

by Mortgage Nerd on February 26, 2013 · 0 comments

When you “lock” your interest rate with a lender you are essentially entering into an agreement with your lender in which the lender agrees to assume the risk of the interest rate changing during the time of the lock period, and you are agreeing to close your loan with the lender even if the interest rate goes down. However, every lender has different terms regarding their interest rate lock agreements and it is it imperative that you know the questions to ask because it could be the difference in hundreds to thousands of dollars in savings. In this blog post I will outline the questions that you need to ask your lender about their interest rate lock terms.

What are your different lock periods and what is the difference in price for each lock period?… This question is important because every lender has different lock periods that come with a cost. For example, one lender might offer lock periods of 7, 18, or 30 days.  Others might offer 15, 30, and 45 days.  Some lenders may even offer up to a 180 or 300 day lock.  The general rule of thumb is the longer the lock period the more you will pay in discount points. For example, you may pay an extra .25% ($250 on a loan of $100,000) in closing costs for a 30 day lock versus a 15 day lock.  If your settlement deadline is only 14 days away, there is no sense in doing a 30 day lock.

Do you guarantee your process times and do you have lock extension fees?… Because there are certain loan processing requirements out of a lenders control, very few lenders will guarantee a processing time and these same lenders won’t pay for your lock extension fees if your lock expires. If you are working with these lenders you will want to make sure that you lock for a long enough period to get the loan done so that you don’t have to pay any extension fees. Some lenders have extension fees of .25% ($250 on 100,000) for every 7 days. The other option is to find a lender that will either guarantee the processing time or absorb the cost of the lock extension.

What happens if my lock expires and I don’t do an extension?… Many lenders have a policy called worst case pricing.  This means that if you lock your interest rate and rates come down, you aren’t able to let your lock expire and get the better rate.  At one lender I use to work for, to get the lower rate a borrower would have to withdraw their loan application and wait 30 days before reapplying.  There is another lender that I know of that doesn’t even offer a lock extension. 

Do you have a renegotiation policy?… Some lenders have a one time “float-down” option which allows you to take advantage of a lower interest rate even if you have already locked in.  Others might have a renegotiation policy where, for a cost,  you can renegotiate your locked rate lower if interest rates have fallen. Others may have no renegotiation policy at all and when you lock your rate that is what you will get. 

Is my lock valid if I change loan programs or the size of my loan?… For many lenders, if your loan program changes or if your loan amount changes by more than 20%, this will invalidate your lock and you will be subject to the market rate, which could be bad news if interest rates have gone up.  If you are deciding between a couple of different loan programs (i.e. 15 year, 30 year, 7/1 ARM) this would be a very important question to ask.

What is the longest lock period that you offer?… This would be a very important question for somebody that is building a home or has a lease-option transaction, or any transaction that might take longer than normal.  The longest lock period at some lenders might only be 60 days while others might offer 360 days.  Many lenders will have an up-front fee, besides the extra discount points,  for any lock longer than 90 days. 

When will you lock the interest rate?… A smart loan officer will answer this question with, “When you tell me to lock it”.  Some people may not like this answer but ultimately the choice to lock in an interest rate rests on the borrower’s shoulders.  A good loan officer should explain how interest rates move and the potential advantages and disadvantages of locking versus floating (not locking), but wait to lock in an interest rate until the borrower says so.  It is important to discuss this with your loan officer so that there are no misunderstandings when it comes to locking in the rate.

I believe that Lock Policy is one of the characteristics that can be very different amongst lenders. When you are shopping around for a mortgage make sure that you are asking these questions along with your questions about interest rates and closing costs.  One lender might have a great interest rate on a 18 day lock but if it takes them 90 days to process the loan than it could end up costing you much more than you bargained for.

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