The best time for you to lock a loan
You’ve been advised to lock your loan, but you don’t really know what that means. So, here’s a primer: A loan lock is an agreement that your mortgage lender gives you which serves as a guarantee to fund a loan that you want at a mutually agreed upon interest rate and points, regardless of points, fees or interest rates rising when the loan was disbursed.
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But what if your loan is not locked? It’s good to check that you don’t run high risks in case your loan is not locked. If you decide to wait and watch, you reduce your chances of areas in which you could procure a mortgage. Perhaps you’ve decided on the kind of loan product you need but if the Fed continues to cut interest rates, you might do well in not locking your loan.
And what happens if interest rates rise? This seems like a gamble and anyone who’s in it will vouch that it is really so. However, if rates rise, you don’t have any hedge against it—you’re stuck with paying higher interest rates. So, be careful.
What to consider when locking your loan: There are three chief points to consider when you lock your loan. These are:
Usually, as a borrower for a mortgage, you never really know when to lock the interest rate with your lender by saying to him, “I want my loan from you at this interest rate. Can you guarantee this interest rate for me?” If you have a good and sensitive loan representative, he or she can go a long way in making the right decision for you.
Usually, borrowers always end up paying more for an extended loan lock. Either the interest rate is higher or the points can be a pointer towards the fee of the loan lock. This is because the lender assumes the risk that interest rates could rise in the course of the transaction, which means the lender could lose valuable money if the loan is funded at a rate that’s lower than the market’s interest rate. However, if the loan is locked, the borrower’s risks are far reduced, which is why real estate professionals recommend that borrowers go in for this.
While choosing a loan lock agreement, take care to choose the one most suited to you as if a loan does not close within a set timeframe, the loan lock stands nullified.
Is there any flexibility in this arrangement? By locking in your interest rate, a borrower is not restricted to that one lender but is free to look for a loan elsewhere and procure it if it is to his advantage. However, if interest rates fall and the borrower threatens to go elsewhere, the lender will only be too happy to renegotiate the interest rate to a mutually acceptable one, if only to hold on to a customer.
How are the rates on loan locks calculated? If a borrower is looking at a lock of a 30-day period, it might translate into ½ a point. On the other hand, a loan lock period of 60 days could mean one point. Fees for this are paid when the loan closes. But if the loan is never closed, it means the fees are not paid at all. The borrower also has the option of paying not through points but calculated into the rate of interest.
Locking your loan is the best hedge against the volatility of the stock market. So, go ahead and lock your loan.
By Mithi Chinoy
