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Locking-in the Mortgage Loan Rate

 

Mortgage loan rates fluctuate and constantly going up and down. Most lenders will commit, in writing, to a mortgage interest rate for a specified time period while your loan application is processed - this is known as "locking-in" the rate.

If you think mortgage loan rates will go up before you close escrow on your new Martha's Vineyard home you may want to lock in a rate now. If you elect to lock-in an interest rate, it is best to deal with a lender who provides a written lock-in agreement that specifies the rate lock or rate commitment time period for 20, 30, 45, 60, 90 or, if you can get it, 120 days.

You want to make sure you ask the mortgage lenders you are considering about the lock-in options they offer. One interest rate option is "lock-in plus points". This is the most stable option because neither your interest rates nor points increase during the lock-in period. This also gives you the clearest picture of how much your mortgage loan will cost you and it protects you against any rise in market conditions.

Another option is "lock-in plus floating points". Simply put, this means that the interest rate is fixed during the lock-in period, but your points may rise and fall according to market conditions. You may still have the option to lock-in the points anytime between the loan application and the closing, so clarify that with the lender.

Finally, there is the "floating lock-in plus floating points" option, which is great if you are a soothsayer, on an inside track with Ben Bernanke, or like to gamble. This may not be the best option for marginal buyers who have tight budgets.

Guess what --- most lenders charge a fee for locking in the interest rate and points. Depending upon the lock-in period, the fee may vary from lender to lender and when it is charged the fee may be due when you lock-in the rate. The fee is rarely refundable if your credit is denied, or if you withdraw your application, or if you do not close on the loan. It may also be deferred and included in your closing costs.

Some lenders may only have short lock-in periods. Still others may offer a longer lock-in period. Lenders will most commonly offer lock-in periods from 30 to 60 days; the longer the lock-in period, the higher the fees. It is important to make sure that the lock-in period is long enough for the loan approval process and to allow for any other contingencies that may delay closing. I have seen it happen too many times where glitches in the closing process have placed the agreed upon mortgage loan in jeopardy.

If the unexpected does happen and the rate lock expires prior to closing, whether caused by you or others in the process including the lender, you will lose the interest rate and points. You are then most likely subject to the prevailing interest rates and points for the loan. This could mean thousands of added dollars during the life of the loan, so be sure to ask your lender before you lock-in what interest rates and points will be charged if the loan is not closed before the lock-in period expires.

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