After you choose a lender and receive preapproval for a loan, the rest of the process requires you to find a home, provide the appropriate documentation for underwriting and wait for the closing date. One last thing you must do, however, is to determine the right time for a rate lock with your lender. There are many options, but the most common include 30, 45, 60 and 90-day locks. How do you know which one is right for you?
Loan Approval must Come First
The first thing you must obtain in order to lock an interest rate is the loan approval. This typically means the preapproval you receive from the lender. This means the lender looked over your qualifying documents, such as your income, employment, and credit and determined the loan amount you are eligible to receive. At that point, you are able to start searching for a home because you have a preapproval letter and you know the price range you can shop in for a home. This is not the best time to lock your interest rate, however, because you do not yet have a home to purchase and you have no idea how long the process will take.
Shopping for a Home
Once you secure that preapproval letter, you are able to shop for a home. This process could take you a few days or a few months; no one knows! If you were to lock your interest rate in before you found a home, you could run into a situation where the lock expires. At that point, you either have to take the current market interest rates or pay a fee to extend your rate lock. Paying for the extension is just another fee tacked onto your home purchase and you have no way to know if the current market interest rates will be higher or lower than your locked rate, so it really is a gamble.
Waiting for the Contract
The best time to consider a rate lock is after you secured the purchase contract and every interested party approves it. If there are negotiations going back and forth or issues that hold the process up, you do not want to have a locked in rate ticking away day by day while things get worked out. Once the contract is final, you can start looking at interest rates and how much it will cost you to lock them for the specified period of time you need. You will know the date you need the lock to be good through because the contract must disclose the closing date.
What is the Normal Processing Time?
Another consideration to make is what the normal processing time is for loans in your area. Your lender should be able to tell you what to expect if everything goes as planned. Of course, you should always plan for a few bumps in the road as no loan passes through the process with flying colors. With a little cushion on the timeline, you should be able to guesstimate just how long you need to lock your interest rate in order to keep the desired rate you want to lock.
What will the Rate Lock Cost?
Another consideration you need to figure into the decision is how much the rate lock will cost. Every lock has a different price – it depends on the length of time you require it. Typically, a 60-day lock is more expensive than a 30-day lock, for example. This is simply because the bank must legally provide you with the interest rate you locked in whether you locked it for 30 or 60 days. Because rates can change so drastically within 60 days, the lender takes a gamble providing you with that locked in rate. You can always ask the lender what the different lock periods are and what they will cost you so that you can figure out the best option for you.
What are your Circumstances?
Another factor you should consider when you determine your perfect time to lock an interest rate is your exact circumstances. How close is your debt ratio to the maximum allowed for the program? If you are close and interest rates are low right now, you might want to pay the extended lock fee just to keep the low-interest rate and therefore the low debt ratio. If a small increase in the interest rate could put you over the edge, the lender should help you determine when to lock the rates so that you can guarantee that you have the low rate necessary to keep your approval.
What if Rates Drop?
One of the largest concerns most borrowers have is what if interest rates drop after they lock in an interest rate? If the drop is drastic enough, most lenders will work with you. Sometimes this takes a little negotiation since the lender loses out on the deal, but with a small fee to float the rate down, you can typically secure the lower interest rate. Most lenders are willing to do this because they would rather take the hit on the interest rate than lose your loan entirely to another lender that can offer you the lower rate.
Get it in Writing
The most important thing you can do with a rate lock is to get it in writing. You need the lender to confirm not only the interest rate that you locked in at, but also:
- The date the lock is good through
- How much the lock costs
- Any options you might have if the rate lock expired or if rates dropped
When you have everything in writing, there is no guessing or negotiating necessary. Everyone is on the same page in this situation and can take the appropriate steps to rectify the situation if the lock were to expire.
Timing the rate lock with the lender can seem complicated. The good news is that the lender does this on a daily basis and can walk you through the process. Make sure you ask plenty of questions and read all of the fine print so that you know exactly what will happen if your lock expires. This way there are no surprises and you are not searching for new financing while the clock ticks on your required closing date according to your sales contract.