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7. What is a ratelock?
You cannot close a mortgage loan without locking in an interest rate.
There are four components to a rate lock:
- Loan program.
- Interest rate.
- Points.
- Length of the lock.
The longer the length of the lock, the higher the points or the
interest rate. This is because the longer the lock, the greater the
risk for the lender offering that lock.
Let's say you lock in a 30-year fixed loan at 8% for 2 points for
15 days on March 2. This lock will expire on March 17 (if March 17
is a holiday then the lock is typically extended to the first working
day after the 17th). The lender must disburse funds by March 17th,
otherwise your rate lock expires, and your original rate-lock commitment
is invalid.
The same lock might cost 2.25 points for a 30-day lock or 2.5 points
for a 60-day lock. If you need a longer lock and do not want to pay
the higher points, you may instead pay a higher rate.
After a lock expires, most lenders will let you re-lock at the higher
of the current market rate/points or the originally locked rate/points.
In most cases you will not get a lower rate if rates drop.In some
cases, you may be able to negotiate a rate lock extension at the
original price, but this must be done with the lender prior to the
rate lock expiration date. An additional fee may be charged for this
extension
Lenders can lose money if your lock expires. This is because they
are taking a risk by letting you lock in advance. If rates move higher,
they are forced to give you the original rate at which you locked.
Lenders often protect themselves against rate fluctuations by hedging.
Some lenders do offer free float-downs––i.e. you may
lock the rate initially and if the rates drop while your loan is
in process, you will get the better rate. However, there is no free
lunch––the free float-down is costly for the lender and
you pay for this option indirectly, because the lender has to build
the price of this option into the rate.For example: the 'float down'
rate may be 0.125% to 0.25% higher than the current market rate
What do you do if the rates drop after you lock?
Most lenders will not budge unless the rates drop substantially
(3/8% or more). This is because it is expensive for them to lock
in interest rates. If lenders let the borrowers improve their rate
every time the rates improved, they spend a lot of time relocking
interest rates, since rates fluctuate daily. Also they would have
to build this option into their rates and borrowers would wind up
paying a higher rate. One option is to switch lenders. In this case,
you will be starting the loan process from the beginning, unless
you have your loan with a mortgage broker that will allow you to
move your loan application to a new lender at the lower rates, and
use the same loan package. It is always best to notify your lender
that you have shopped and found that rates have dropped, then discuss
your options with them before deciding to make a new application
elsewhere.
Lock-and-shop programs.
Most lenders will let you lock in an interest rate only on a specific
property,which means, if you are shopping for a home, you cannot
lock in an interest rate until after you sign a purchase contract
for a specific property. If you are shopping for a house, some lenders
offer a lock-and-shop program that lets you lock in a rate before
you find the house. This program is very useful when rates are rising.However,the
rates are usually higher than the current market rate and/or the
lender may charge a non-refundable fee or deposit towards closing
costs.
New-construction rate locks.
Most lenders offer long-term locks for new construction. These locks
do cost more and may require an up-front deposit. For example, a
lender might offer a 180-day lock for 1 point over the cost of a
30-day lock, with 0.5 points being paid up-front, as a non-refundable
deposit. Most long-term new-construction locks do offer a float-down––i.e.
if rates drop prior to closing, you get the better rate.
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