What are Mortgage
Lock-ins?
When you’re looking for a mortgage, you’re likely to shop among lenders
for the most favorable interest rate, and the lowest points and other
up-front charges. When you find the most favorable terms and the lender that
you want, you’ll apply to that lender. But when you get to settlement, will
you actually receive the terms you applied or bargained for? Or will you
find that the rate has changed -- and that your costs have gone up?
Lock-ins on rates and points might offer you a way to ensure that what you
shop for is what you get. This brochure explains what these arrangements
mean.
All About Lock-Ins
In most cases, the terms you are quoted when you shop among lenders only
represent the terms available to borrowers settling their loan agreement at
the time of the quote. The quoted terms may not be the terms available to
you at settlement weeks or even months later. Therefore, you should not rely
on the terms quoted to you when shopping for a loan unless a lender is
willing to offer a lock-in.
What Is a Lock-In?
A lock-in, also called a rate-lock or rate commitment, is a lender’s promise
to hold a certain interest rate and a certain number of points for you,
usually for a specified period of time, while your loan application is
processed. (Points are additional charges imposed by the lender that are
usually prepaid by the consumer at settlement but can sometimes be financed
by adding them to the mortgage amount. One point equals one percent of the
loan amount.) Depending upon the lender, you may be able to lock in the
interest rate and number of points that you will be charged when you file
your application, during processing of the loan, when the loan is approved,
or later.
A lock-in that is given when you apply for a loan may be useful because it’s
likely to take your lender several weeks or longer to prepare, document, and
evaluate your loan application. During that time, the cost of mortgages may
change. But if your interest rate and points are locked in, you should be
protected against increases while your application is processed. This
protection could affect whether you can afford the mortgage. However, a
locked-in rate could also prevent you from taking advantage of price
decreases, unless your lender is willing to lock in a lower rate that
becomes available during this period.
It is important to recognize that a lock-in is not the same as a loan
commitment, although some loan commitments may contain a lock-in. A loan
commitment is the lender’s promise to make you a loan in a specific amount
at some future time. Generally, you will receive the lender’s commitment
only after your loan application has been approved. This commitment usually
will state the loan terms that have been approved (including loan amount),
how long the commitment is valid, and the lender’s conditions for making the
loan such as receipt of a satisfactory title insurance policy protecting the
lender.
Will Your Lock-In Be In Writing?
Some lenders have preprinted forms that set out the exact terms of the
lock-in agreement. Others may only make an oral lock-in promise on the
telephone or at the time of application. Oral agreements can be very
difficult to prove in the event of a dispute.
Some lenders' lock-in forms may contain crucial information that is
difficult to understand or that is in fine print. For example, some lock-in
agreements may become void through some unrelated action such as a change in
the maximum rate for Veterans Administration guaranteed loans. Thus, it is
wise to obtain a blank copy of a lender’s lock-in form to read carefully
before you apply for a loan. If possible, show the lock-in form to a lawyer
or real estate professional.
It is wise to obtain written, rather than verbal, lock-in agreements to make
sure that you fully understand how your lender’s lock-ins and loan
commitments work and to have a tangible record of your arrangements with the
lender. This record may be useful in the event of a dispute.
Will You Be Charged for a Lock-In?
Lenders may charge you a fee for locking in the rate of interest and number
of points for your mortgage. Some lenders may charge you a fee up-front, and
may not refund it if you withdraw your application, if your credit is
denied, or if you do not close the loan. Others might charge the fee at
settlement. The fee might be a flat fee, a percentage of the mortgage
amount, or a fraction of a percentage point added to the rate you lock in.
The amount of the fee and how it is charged will vary among lenders and may
depend on the length of the lock-in period.
What Options Are Available for Setting the Mortgage Terms?
Lenders may offer different options in establishing the interest rate and
points that you will be charged, such as:
Locked-In Interest Rate--Locked-In Points. Under this option, the lender
lets you lock in both the interest rate and points quoted to you. This
option may be considered to be a true lock-in because your mortgage terms
should not increase above the interest rate and points that you’ve agreed
upon even if market conditions change.
Locked-In Interest Rate--Floating Points. Under this option, the lender lets
you lock in the interest rate, while permitting or requiring the points to
rise and fall (float) with changes in market conditions. If market interest
rates drop during the lock-in period, the points may also fall. If they
rise, the points may increase. Even if you float your points, your lender
may allow you to lock-in the points at some time before settlement at
whatever level is then current. (For instance, say you’ve locked in a 10½
percent interest rate, but not the 3 points that went with that rate. A
month later, the market interest rate remains the same, but the points the
lender charges for that rate have dropped to 2½. With your lender’s
agreement, you could then lock in the lower 2½ points.) If you float your
points and market interest rates increase by the time of settlement, the
lender may charge a greater number of points for a loan at the rate you’ve
locked in. In this case, the benefit you might have had by locking in your
rate may be lost because you’ll have to pay more in up-front costs.
Floating Interest Rate--Floating Points. Under this option, the lender lets
you lock in the interest rate and the points at some time after application
but before settlement. If you think that rates will remain level or even go
down, you may want to wait on locking in a particular rate and points. If
rates go up, you should expect to be charged the higher rate.
Because practices vary, you may want to ask your lender whether there are
other options available to you.
How Long Are Lock-Ins Valid?
Usually the lender will promise to hold a certain interest rate and number
of points for a given number of days, and to get these terms you must settle
on the loan within that time period. Lock-ins of 30 to 60 days are common.
But some lenders may offer a lock-in for only a short period of time (for
example, 7 days after your loan is approved) while some others might offer
longer lock-ins (up to 120 days). Lenders that charge a lock-in fee may
charge a higher fee for the longer lock-in period. Usually, the longer the
period, the greater the fee.
The lock-in period should be long enough to allow for settlement, and any
other contingencies imposed by the lender, before the lock-in expires.
Before deciding on the length of the lock-in to ask for, you should find out
the average time for processing loans in your area and ask your lender to
estimate (in writing, if possible) the time needed to process your loan.
You’ll also want to take into account any factors that might delay your
settlement. These may include delays that you can anticipate in providing
materials about your financial condition and, in case you are purchasing a
new house, unanticipated construction delays. Finally, ask for a lock-in
with as few contingencies as possible.
What Happens If the Lock-in Period Expires?
If you don’t settle within the lock-in period, you might lose the interest
rate and the number of points you had locked in. This could happen if there
are delays in processing whether they are caused by you, others involved in
the settlement process, or the lender. For example, your loan approval could
be delayed if the lender has to wait for any documents from you or from
others such as employers, appraisers, termite inspectors, builders, and
individuals selling the home. On occasion, lenders are themselves the cause
of processing delays, particularly when loan demand is heavy. This sometimes
happens when interest rates fall suddenly.
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