Mortgage Interest Rate Locks 101: UPDATED

EDITORS NOTE: One of the joys of writing a mortgage blog is that guidelines and procedures change…and change often.  This gives me a great opportunity to provide you with an updated post.  With HUD’s creation of the 2010 Good Faith Estimate, a lot of the information in the original post is no longer relevant (relating to the GFE) from the original article I wrote on locking back in 2007.  With that said, here’s my updated post…we’ll see if we need to revise this again once CFPB issues their version of the Good Faith Estimate! 

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 your written rate quote?

Until your loan is “locked” the interest rates on a rate quote is simply a reflection of what the rate is at the moment the Loan Originator prepared the quote.   In fact it’s possible that the rate may have changed just moments after the rate quote was provided to the client.   Mortgage interest rates can change throughout the day.   A rate quote is not a guarantee of the mortgage interest rate, costs or that one is qualified or approved for a loan program.   

Does a Good Faith Estimate mean that my rate is locked?

A Good Faith Estimate will show you how long the quoted rate on the GFE is available on page 1 under “Important Dates” on line 2. The rate may be locked or “floating” (not locked).  If the rate is locked, line 2  will show when the rate will expire. If the rate is not locked, there will still be a date and possibly a time on line 2. Often times, when a rate is not locked, that date/time may be the date/time the mortgage originator prepared the Good Faith Estimate as rates change constantly and may change while the GFE is being prepared.

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.

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.

Click here for your rate quote for homes located in Washington.

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.

If a lock expires and the rate lock is not extended, lenders may have different policies with how this is treated. Some may allow the rate to go to current market pricing and others may allow “worse case” pricing (meaning the locked rate vs. current rates).

Once you have locked in your loan, you should receive:

1. Written lock confirmation stating what the rate and points are associated with that rate.
2. Good Faith Estimate detailing the rate and lock period. If you have received a GFE prior to the lock, your mortgage professional should issue a revised Good Faith Estimate.

What ever you do, please do not select the person who will be assisting you with your largest investment (your mortgage) by interest rate alone.

I’m happy to help you with your mortgage needs for your home located anywhere in Washington State. If you would like me to prepare a rate quote for you, click here.