First and foremost, never assume your rate has been locked in when you apply for a loan. The lender has to originate your loan under a specific loan program and must state a rate on the application. The corresponding rate noted on your loan application in no way means your rate is locked in and guaranteed at that rate. The rate stated on your loan application is simply the rate under which your application will be qualified and your loan ratios will be run. So until you receive both oral and written confirmation from your lender that your rate is locked in, never assume that it is. Also it is important to remember that a rate lock works both ways and should be mutually honored by both parties. Once a lender commits to locking in your rate, naturally you would be pretty upset if rates started to rise and the lender refused to honor the rate lock so conversely if you choose to lock in your rate and then rates decline, you should not demand a lower rate, try to switch lenders or refuse the loan. A rate lock agreement should work both ways and should be honored by both parties if it is expected to be honored by only one party, then it is not a mutual contract.
What should you do if you want the best possible interest rate when your loan closes? If your mortgage loan involves a purchase transaction and if you are on the margin of qualifying for the loan and at risk of jeopardizing your loan approval if rates were to rise .25%+ or more, then it is probably in your best interest to lock in your rate sooner rather than later. However if any other purchase or refinance conditions apply, consider the following guidelines:
Fully explore all your rate lock options. Each option available has corresponding costs involved. Typically the longer the lock period, the higher the points associated with the rate lock. Customary rate lock periods are 15, 21, 30 and 60 days and locks of these durations do not normally require upfront lock in fees. Occasionally 75 to 90+ day rate locks are offered, however locks of these lengthy terms may require an upfront or advance lock fee. Also note that some lenders, particularly lenders funding higher risk loans, may not lock rates on loans until they are approved and ready for loan documents to be drawn.
If you have reason to believe that rates are headed lower (i.e. the economy is slowing, heading into recession) then you will likely want to hold off on locking until you are closer to closing your loan or closing escrow. Conversely if you believe rates are headed higher (i.e. evidence of a strong economy, inflationary climate) then you may want to lock sooner or even at the time of application.
Be sure that the terms of the rate lock are clearly stated and confirmed in writing. A written rate lock confirmation should contain at least the following information: note rate, APR, loan program, total points required and the term of the lock along with the lock expiration date. It is best if someone of authority within the lender's organization signs the rate lock as well as your signing the confirmation yourself.
You also want to be clear about the lender's policy if the locked rate were to expire before your loan has funded. Typically the outcome here will vary depending upon whether you, the borrower, were responsible for any delays preventing your loan from moving forward or whether the delays were caused by the lender or within the lender's organization. Sometimes this can turn into a blame game so you always want to stay on top of your loan officer or agent to make certain the lender is not waiting on you to provide anything to advance the loan process. However it's a good idea to clarify the potential problems and their corresponding outcomes upfront.
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Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.