Mortgage Interest Rate Locks 101
EDITORS NOTE: With changes to the 2010 Good Faith Estimate, a lot of the information below is no longer relevant (relating to the GFE). However, the pricing is still a good example of how locks work.
I love it when I’m asked an excellent question from a potential client. This person is still shopping for his next home and who the lender will be to provide financing. At this point, I have provided several good faith estimates and a total costs analysis to compare possible scenarios side by side along with how the mortgages may be working for him in 5 and 10 years.
Here are a few of his questions:
What level of guarantee can you offer me with these rates you have provided on the Good Faith Estimates?
Until your loan is “locked” the interest rates on the Good Faith Estimate (GFE) is simply a reflection of what the rate is at the moment the Loan Originator prepared the GFE. In fact it’s possible that the rate may have changed just moments after the GFE was provided to the client. Mortgage interest rates can change throughout the day. The GFE is not a guarantee of the mortgage interest rate, costs or that one is qualified or approved for a loan program. (I have addressed guarantees towards the of this post).
Can I lock in my rates and closing costs before I find my new home?
Typically, the buyer has a signed around (agreed to) purchase and sale agreement. Most locks require a property address along with the borrowers full legal name, social security number, program type, purchase price/loan amount and credit scores along with the length of time required to close the transaction.
Some lenders, like Mortgage Master, have a “lock and look” feature which does allow buyers to lock their interest rate before finding their next home. Unless the market is experience ramped rate increases, I recommend not doing this. The locks are for longer terms (so they are more expensive) and should rates improve, odds are the buyer is not going to want the long term rate they’ve committed to with the lock.
How long is the lock period?
Locks have various time periods that are available to accommodate a borrowers needs. The most common for a purchase is a 30 or 45 day lock. Again, loans are locked in based on how many days are needed to accommodate the transaction closing date. The longer the lock period, the higher the costs is for a specific rate.
For example, here is what the difference in fee may look like based on various lock times assuming the 30 day lock is par or neutral (comparing the other locks to 30 days):
- 15 day lock = 0.125 better over the 30 day price
- 30 day lock = 0
- 45 day lock = 0.05 cost over the 30 day price
- 60 day lock = 0.150 cost over the 30 day price
- 70 day lock = 0.270 cost over the 30 day price
- 90 day lock = 0.400 cost over the 30 day price (may have to pay additional upfront lock fee for this long of term)
So if you have a loan amount of $400,000 and a closing date that was just shy of two months away, and you want to have the 30 day rate, the cost may be $600 (400k x 0.15). If you have a longer closing, a Mortgage Professional should advise you of your options of locking now or waiting until your close date is more near and what the risk are (rates changing). At 70 and 90 days, instead of paying an increased cost for the 30 day rate, you could also opt for a slightly higher rate (0.125%) and still have the 30 day pricing (it would be factored into the rate). Again, the above numbers are just an example of possible pricing. Rates and pricing do change constantly.
You can lock 90 days and beyond. However, the cost increased (as you can see from my figures above) and there is often an additional upfront lock fee that is non-refundable.
It’s important that the loan is locked in for the right amount of time. If a loan does not close before the lock expiration date, the lender is put in a position to where they may need to extend the lock. The price of a lock extension varies from lender to lender and, if the market has improved from when the loan was originally locked, there may not be a cost for a shorter extension. Some lenders charge 0.015 per day of the extension; so if 10 more days were required to close and fund the loan, the cost could be 0.15% (0.015 x 10 days) of the loan amount. On a $400,000 loan amount, this is an additional cost of $600. You can see why it’s important to lock your loan correctly in the first place.
I recommend that when you lock in your loan, you ask your Mortgage Professional to guarantee the closing costs associated with the loan. Third party costs, such as the appraisal title and escrow fees, the Mortgage Professional has no control over. I would not work with any Loan Originator who is not willing to stand by their closing costs. As a borrower, you should be able to bring your Good Faith Estimate with you to closing (your signing appointment) and have the lender’s fees be reasonable close.
Once you have locked in your loan, you should receive:
Written lock confirmation stating what the rate and points are associated with that rate.
Request an updated Good Faith Estimate (and ask the lender if they are going to guarantee their loan costs) to correspond with the lock. [2010 UPDATE: You may find that mortgage originators will provide a written rate quote prior to providing a Good Faith Estimate with an actual Good Faith Estimate to follow.]