Why Do You Want To Talk to Your Mortgage Loan Officer About Rate Locks?

The Borrower

When a borrower needs a mortgage to either purchase or refinance a home, they typically shop for both a mortgage loan officer as well as a favorable interest rate and points in combination with other up-front charges (charges vary between lenders and brokers).  I personally believe a borrower must trust the integrity and professionalism of their mortgage loan officer first and not choose a lender based on rate/points alone.  But that is another story.

Here I want to talk about rate locks.  When a borrower is satisfied with their lender's terms, they will apply for the mortgage.  A this time (or before), the borrower should have had a discussion with their mortgage loan officer about locking their mortgage rate.

Why do you need to lock the rate?  

A rate is considered floating till the rate is locked.  Rates can change from hour to hour.  The rate originally quoted when the borrower applies for a loan may not be the same as the rate locked in at unless they are executed simultaneously and before another rate change.  A rate lock allows the borrower to freeze their rate/points while the lender prepares documents and underwrites the loan application. During this time, the cost of mortgages may change due to market conditions. But if the borrower's rate and points are locked, the borrower is protected against any increases. However the opposite is true; a rate lock could also prevent the borrower from taking advantage of rate decreases (unless the lender is willing to lock in a lower rate that becomes available during this period).  This is why a borrower needs to have that discussion about locking their rate at or before applying their mortgage.  The mortgage loan officer may give thier professional estimate about how rates may move with respect to current market conditions, but it will only be an educated guess.  Ultimately, it is the borrower's responsibility to make the decision when to lock their rate.

A rate should be locked for a long enough period to allow the lender to process your application and take into account any contingencies or factors that might delay processing.  If the period you lock your rate at is not long enough so you, the borrower, are unable to sign, fund and record the new deed of trust before the lock period expires, the borrower has several options:

Rate Lock Extensions:  Extend the rate lock.  Common rate lock extensions are for 1, 3, 7, 15, or 30 days with associated price adjustments and this must be granted prior to the expiration of the original rate lock.  The additional price adjustments depend on the rate lock's extension period: the longer the extension, the higher the cost.

Rate Relocks:  For all relocks (the rate lock must have expired), the rate and discount points will be the higher of the original rate and discount points plus the cost for any previous rate extension or the current rate and discount points for the new lock term.  If the loan expires and is relocked within 60 days of expiration, in all instances, the relock will be at the worst case of rate or price.  The new lock will be priced at the higher of:

• The original locked price plus previous extension costs (if applicable), or
• The current market price, whichever is greater.

If more than 60 days have passed since the lock's expiration date, a loan is considered a new application and may be locked at the current rate and points.

Definitions:

Rate lock:  A rate lock is a lender's promise to hold a certain interest rate and a certain number of points for a specified period of time while your loan application is processed.  Common rate locks are for 15 days, 30 days and 60 days.  The longer the lock period, the more risk to the lender so the higher the cost (points) to lock the rate.  Your mortgage terms should not change during this period even if market conditions change

Extensions:  Extensions are defined as lengthening the rate lock period prior to the expiration date.  Expired locks are not eligible for rate lock extensions.

You can find AJ Nisen on Active Rain at Contra Costa California Mortgages.  Call AJ to talk about Mortgage Rates, Free Credit Report or visit AJ's website to use his mortgage calculator. 

Alan 'AJ' Nisen
Mortgage Loan Officer
Email: aj.nisen@bankofamerica.com
http://mortgage.bankofamerica.com/ajnisen 
http://www.activerain.com/ajn