By Dian Hymer
Rising interest rates make homebuyers nervous. As rates go up, buyers find it harder to qualify for mortgages. Buyers who can barely afford to buy a home at today's interest rates are often priced out of the market when rates move even higher. One way to keep cost down is to lock in an interest rate before rates rise further.
An interest rate lock-in is a commitment from a lender to loan you money at a specific interest rate. The commitment is good for a certain period of time, typically 30 days. If you cannot complete your purchase or refinance within that time frame, you lose the commitment. The lender may still be willing to give you a mortgage, if you qualify, but it will be at a higher interest rate than was promised to you in the lock-in agreement if rates have risen in the meantime.
Usually you need to have an accepted offer to purchase a home before a lender will lock-in a rate for you. With an accepted offer, some lenders will lock you in at the time you complete a loan application. Others won't lock you in until your mortgage is approved.
Some lenders, like Countrywide, allow you to lock in a rate while you're looking for a home.
These lenders often require that you go through the pre-approval process. This means you must complete a loan application, provide the required financial documentation and have your credit checked.
Lenders also vary on the length of their lock-ins and the amount they charge borrowers for the privilege of locking in. Some lenders offer a full range of lock-ins from 15 to 120 days. Interest rates may vary depending on the length of the lock-in-the shorter the lock-in time, the lower the interest rate. Also, there's usually an additional up-front fee charged for a lock-in. One-eighth of a point for each 15 days is customary (one point is equal to 1 percent of the mortgage amount).
The alternative of locking in an interest rate is to allow the rate to float during the mortgage-processing period. The benefit of not locking in is that if interest rates move lower before the final loan documents are drawn, the borrower gets the benefit of the lower rate. So when interest rates are declining, it's better to let the rate float. If interest rates drop after you've locked in, most lenders will not pass on the benefit of the lower rate to the borrower.
Cendant Mortgage offers a rate protection option that is like a lock-in, but it allows the borrower more flexibility if interest rates drop. With rate protection, your interest rate can't go higher than .25 percent above the protected rate. If interest rates drop, you have a one-time option to lock in at a lower rate.
First Time Tip: Your loan agent should be able to advise you about whether or not it's advantageous to lock-in a rate. In today's rising interest rate environment, most buyers are opting to lock-in. Once you've locked in a rate, your loan must close before the lock-in expires or you lose the rate. Therefore, make sure that you follow up on all the necessary financial documentation, like verifications of deposit and employment, so that you're closing is not delayed.
The Closing: You may find that your lock-in expires before the closing date in your purchase agreement. If so, ask the sellers to close early in return for allowing them to rent back from you at a cost equal to what they were paying as an owner.
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