Not locking in your loan rate (interest rate and discount points) can make the difference of thousands of dollars over the life of your loan if you donīt watch what you are doing, and if you donīt lock at the right time.
Some lender will not lock a loan unless the loan is approved and about ready to fund (referred to as a short lock by the lender. You want a 30 day loan program, the lender waits and locks in at a 10 day pricing quote). The longer delay the lender makes in locking your loan (assuming there was a pre-arraigned agreement at a rate and discount fee between you and the loan officer) because the lender is "watching" the market to see if it falls lower then expected.
If it does, they make more money off of you. If the rate goes up, they call you and indicate you didnīt lock the rate, therefore the new rate is going to be whatever the market is at that time.
So you can better understand, take a look at the following example: You were originally quoted 8% 30 years at a discount of 1% and the lenders "actual" wholesale costs for the loan was at negative 5% (.500). This simply means if the loan amount were to be $100,000.00 the lender would profit $1,500.00 (plus the loan origination fee, etc.) and would be as follows: $100,000.00 times 1.5% (1% original discount point quoted plus wholesale cost to the lender of .500) equals $1,500.00.
Now, if the lender "Floats" (allowing you to select the rate and discount fees prior to the loan documents being drawn) the market (hoping for the rates (discount rates)) to go down, the lender makes more profit in the transaction. Assume for a moment that the market went down .500%. This would mean that the lender would make two (2%) percent on the transaction.
The additional profit made by the lender really doesnīt affect you unless you want the same discount points originally quoted which in the above example, would allow for a reduced interest rate.
The opposite occur should the rate fluctuate upwards. You may be charged a higher interest rate or more in discount fees (in order to maintain the same interest rate as originally quoted) in order to offset any potential losses the lender might have.
Lenders do not always lock a loan at application unless the borrower is refinancing there home or other property or unless there is a purchase involved and there is an offer and acceptance included in the loan package. In this case, the loan lock is referred to as a float. (not locked in).
When you are discussing rates and points with a lender (on a preliminary basis) the lender will usually be quoting rates and discount points based on that days rate sheets and will not be a guarantee they will be the same tomorrow or at some time in the future.
How is the loan locked in depends on some factors as mentioned above. Is the property already secured (refinance for owner or non-owner-occupied or is this a new purchase with an offer and acceptance included in the loan application) then you and the lender agree on the interest rate, term, loan program, discount points (if any) and origination fees (if any) and the loan is then made. (you sign and date the "Lock Agreement, or, Rate-Lock Agreement, or, Rate-Commitment. Whatever the lender refers to as their confirmation that an interest rate and other terms have been agreed upon between you and them (the lender).
Once the loan is locked (for a specified period of time, 30-60-90 days or longer) the interest rate and other costs associated with the rate (discount points, loan origination fees) cannot change. If the lender wants to "Float" the market themselves and the market goes up (as previously shown as an example) then it does not affect you, only the lender is affected if are any losses are involved in obtaining the loan at the agreed rate and costs.
The only negative in locking in a loan (during a time when interest rates are fluctuating favorably in a downward fashion) is you may not be able to take advantage of a lower rate should it be available prior to the close of escrow unless you have a "Rate-Lock-Float down agreement with the lender. (Not all lenders offer a Float-lock down agreement).
Once your loan is approved by the lender, they usually issue a loan-commitment (loan approval) which explains the loan amount, interest rate, any conditions, etc. THIS IS NOT CONFIRMATION OF A RATE LOCK AGREEMENT or in any way a guarantee that the rate indicated in the loan-commitment (loan approval) is locked in. Read it carefully. If it indicates that the loan is LOCK in, verify it with the loan officer to be sure.
Oral lock-ins are a common practice with loan officers when locking a loan. If you are accepting an oral lock in and the rate changes (along with discount points, etc.) at closing, what proof do you have that the loan officer actually locked it in? If he did lock it in, what proof does he have that he locked it in with the processor or secondary market?
Should there be a legal dispute over an oral lock-in because the higher interest rate may be costly over the life of the loan, it is very difficult to prove it without something in writing.
Not all lock-in forms are the same. Lenders use different and various types of forms and some have "escape" clauses that protect them in case of a major market change. You can ask for a "Blank" copy of the lock-in that will be used so you can read it and understand what it says.
If you are not sure what is trying to say, see a real estate lawyer or real estate professional for their advise. It is well worth any costs you may be charged.
How much will you be charged in advance for a rate-lock depends on several factors: 1) if the loan is a construction loan with permanent financing after construction (converting to permanent financing) the lender may charge you up-from fees (usually 1% of the loan amount, non-refundable)
2) if the loan-lock is 90 to 120 days the lender may charge you an up-front (non-refundable)fee (usually .250% to .500% of the loan amount) and is credited through escrow.
3) if the loan-lock is 120 to 180 days the lender may charge an up front (non-refundable) fee (usually .500% to 1.00% of the loan amount) and is credited through escrow.
If you have chosen a long term lock-in (90 days or longer), your loan was approved by the lender (a commitment letter sent to you) and you decided to "cancel" the loan for whatever reason, the lender may retain the up-front fees (not give you a refund) or if you loan application is denied or if you do not close the loan.
You should always check the refund options (any costs you might incur if any of the above takes place) and if in doubt to the contents of any agreement, again, see a real estate lawyer or real estate professional. It could possibly save you money.
1) Ask the lender if there are charges for locking the loan. What are they, are they refundable, are they credited through escrow against closing costs.
2) Find out if you can get a lock-in (agreement) in writing and if the lender will lock in the rate and points.
3) If the rate has been locked and the interest rate suddenly falls, do you get the lower interest rate, or do you have to cancel the loan and re-lock? Is there a fee for this? If so, how much, and when does it have to be paid?
Rate-locks expire at the time originally agreed at the time the agreement is signed and your lock has been received by the lender. As an example, you locked your loan in on September 22, 2000, and your lock was a 60 day lock. This simply means your loan is locked and will expire on November 23, 2000 (60 days).
A rate lock also expires on the execution of the agreement (on or before the actual funding date) of the loan. As an example: the loan was locked on September 22, 2000 for 60 days and the loan closed (for whatever reason) on October 17, 2000. The lock has been executed therefore it has expired.
A loan lock expires when a borrower cancels the loan application (in writing). The simplest way to think about a lock is that the "Total" processing, underwriting, loan docs and funding "MUST" be completed within the timeframe of the lock itself (if a 30 day lock, then the loan needs to fund within 30 days).
Lock-in loans do expire when the borrower is still in the loan process although they have signed a rate-lock agreement (or whatever the lender may refer to their specific rate-lock in system) and it can be caused by several factors:
1) failure by the buyer (borrower) to submit all of the requested information (documentationīs, etc.) to the processor, underwriter or funder prior to a specific date.
a) borrowerīs employer has not responded to verification of employment sent out (sometimes two times)
b) borrowers landlord or mortgage company has not responded to verifications. c) bank depositories have not responded to verification of deposits 2) appraiser has not completed the appraisal in a timely manor and the loan cannot fund until there has been an appraisal completed on the property.
3) termite and/or other inspectors have not certified or responded to follow-up conditions requested by the lender or the lenders agents.
4) the builder has not completed construction as agreed and within the time frame of the rate-lock,
5) occasionally the lender themselves are responsible due to excessive loan volume. (This may happen when interest rates decline suddenly)
Should the rate-lock expire, the lender has options: 1) If the rates have decreased, they can offer you the lower rate 2) If the rates have increased, they can offer you the higher rate. 3) If the rates have increased, but you can still get the same rate for a higher discount costs, this can be offered.
(Normally, if the interest rates have increased and the rate-lock has expired, the borrower must be re-qualified at the higher interest rate. There are times that due to the higher interest rates, a borrower no longer qualifies for the loan and must look at other alternatives)
4) If the rate is the same, you made out. Your rate-lock (loan) is "Pre-Sold" to an investor pool through an agreement with them based on the lock-in terms. The agreement expires at the same time the lock-in rate expires and the lender may not be able to sell that rate-lock to another investor at the rate, term, etc. as it was originally entered into.
Some lender will not lock a loan unless the loan is approved and about ready to fund (referred to as a short lock by the lender. You want a 30 day loan program, the lender waits and locks in at a 10 day pricing quote). The longer delay the lender makes in locking your loan (assuming there was a pre-arraigned agreement at a rate and discount fee between you and the loan officer) because the lender is "watching" the market to see if it falls lower then expected.
If it does, they make more money off of you. If the rate goes up, they call you and indicate you didnīt lock the rate, therefore the new rate is going to be whatever the market is at that time.
So you can better understand, take a look at the following example: You were originally quoted 8% 30 years at a discount of 1% and the lenders "actual" wholesale costs for the loan was at negative 5% (.500). This simply means if the loan amount were to be $100,000.00 the lender would profit $1,500.00 (plus the loan origination fee, etc.) and would be as follows: $100,000.00 times 1.5% (1% original discount point quoted plus wholesale cost to the lender of .500) equals $1,500.00.
Now, if the lender "Floats" (allowing you to select the rate and discount fees prior to the loan documents being drawn) the market (hoping for the rates (discount rates)) to go down, the lender makes more profit in the transaction. Assume for a moment that the market went down .500%. This would mean that the lender would make two (2%) percent on the transaction.
The additional profit made by the lender really doesnīt affect you unless you want the same discount points originally quoted which in the above example, would allow for a reduced interest rate.
The opposite occur should the rate fluctuate upwards. You may be charged a higher interest rate or more in discount fees (in order to maintain the same interest rate as originally quoted) in order to offset any potential losses the lender might have.
Lenders do not always lock a loan at application unless the borrower is refinancing there home or other property or unless there is a purchase involved and there is an offer and acceptance included in the loan package. In this case, the loan lock is referred to as a float. (not locked in).
When you are discussing rates and points with a lender (on a preliminary basis) the lender will usually be quoting rates and discount points based on that days rate sheets and will not be a guarantee they will be the same tomorrow or at some time in the future.
How is the loan locked in depends on some factors as mentioned above. Is the property already secured (refinance for owner or non-owner-occupied or is this a new purchase with an offer and acceptance included in the loan application) then you and the lender agree on the interest rate, term, loan program, discount points (if any) and origination fees (if any) and the loan is then made. (you sign and date the "Lock Agreement, or, Rate-Lock Agreement, or, Rate-Commitment. Whatever the lender refers to as their confirmation that an interest rate and other terms have been agreed upon between you and them (the lender).
Once the loan is locked (for a specified period of time, 30-60-90 days or longer) the interest rate and other costs associated with the rate (discount points, loan origination fees) cannot change. If the lender wants to "Float" the market themselves and the market goes up (as previously shown as an example) then it does not affect you, only the lender is affected if are any losses are involved in obtaining the loan at the agreed rate and costs.
The only negative in locking in a loan (during a time when interest rates are fluctuating favorably in a downward fashion) is you may not be able to take advantage of a lower rate should it be available prior to the close of escrow unless you have a "Rate-Lock-Float down agreement with the lender. (Not all lenders offer a Float-lock down agreement).
Once your loan is approved by the lender, they usually issue a loan-commitment (loan approval) which explains the loan amount, interest rate, any conditions, etc. THIS IS NOT CONFIRMATION OF A RATE LOCK AGREEMENT or in any way a guarantee that the rate indicated in the loan-commitment (loan approval) is locked in. Read it carefully. If it indicates that the loan is LOCK in, verify it with the loan officer to be sure.
Oral lock-ins are a common practice with loan officers when locking a loan. If you are accepting an oral lock in and the rate changes (along with discount points, etc.) at closing, what proof do you have that the loan officer actually locked it in? If he did lock it in, what proof does he have that he locked it in with the processor or secondary market?
Should there be a legal dispute over an oral lock-in because the higher interest rate may be costly over the life of the loan, it is very difficult to prove it without something in writing.
Not all lock-in forms are the same. Lenders use different and various types of forms and some have "escape" clauses that protect them in case of a major market change. You can ask for a "Blank" copy of the lock-in that will be used so you can read it and understand what it says.
If you are not sure what is trying to say, see a real estate lawyer or real estate professional for their advise. It is well worth any costs you may be charged.
How much will you be charged in advance for a rate-lock depends on several factors: 1) if the loan is a construction loan with permanent financing after construction (converting to permanent financing) the lender may charge you up-from fees (usually 1% of the loan amount, non-refundable)
2) if the loan-lock is 90 to 120 days the lender may charge you an up-front (non-refundable)fee (usually .250% to .500% of the loan amount) and is credited through escrow.
3) if the loan-lock is 120 to 180 days the lender may charge an up front (non-refundable) fee (usually .500% to 1.00% of the loan amount) and is credited through escrow.
If you have chosen a long term lock-in (90 days or longer), your loan was approved by the lender (a commitment letter sent to you) and you decided to "cancel" the loan for whatever reason, the lender may retain the up-front fees (not give you a refund) or if you loan application is denied or if you do not close the loan.
You should always check the refund options (any costs you might incur if any of the above takes place) and if in doubt to the contents of any agreement, again, see a real estate lawyer or real estate professional. It could possibly save you money.
1) Ask the lender if there are charges for locking the loan. What are they, are they refundable, are they credited through escrow against closing costs.
2) Find out if you can get a lock-in (agreement) in writing and if the lender will lock in the rate and points.
3) If the rate has been locked and the interest rate suddenly falls, do you get the lower interest rate, or do you have to cancel the loan and re-lock? Is there a fee for this? If so, how much, and when does it have to be paid?
Rate-locks expire at the time originally agreed at the time the agreement is signed and your lock has been received by the lender. As an example, you locked your loan in on September 22, 2000, and your lock was a 60 day lock. This simply means your loan is locked and will expire on November 23, 2000 (60 days).
A rate lock also expires on the execution of the agreement (on or before the actual funding date) of the loan. As an example: the loan was locked on September 22, 2000 for 60 days and the loan closed (for whatever reason) on October 17, 2000. The lock has been executed therefore it has expired.
A loan lock expires when a borrower cancels the loan application (in writing). The simplest way to think about a lock is that the "Total" processing, underwriting, loan docs and funding "MUST" be completed within the timeframe of the lock itself (if a 30 day lock, then the loan needs to fund within 30 days).
Lock-in loans do expire when the borrower is still in the loan process although they have signed a rate-lock agreement (or whatever the lender may refer to their specific rate-lock in system) and it can be caused by several factors:
1) failure by the buyer (borrower) to submit all of the requested information (documentationīs, etc.) to the processor, underwriter or funder prior to a specific date.
a) borrowerīs employer has not responded to verification of employment sent out (sometimes two times)
b) borrowers landlord or mortgage company has not responded to verifications. c) bank depositories have not responded to verification of deposits 2) appraiser has not completed the appraisal in a timely manor and the loan cannot fund until there has been an appraisal completed on the property.
3) termite and/or other inspectors have not certified or responded to follow-up conditions requested by the lender or the lenders agents.
4) the builder has not completed construction as agreed and within the time frame of the rate-lock,
5) occasionally the lender themselves are responsible due to excessive loan volume. (This may happen when interest rates decline suddenly)
Should the rate-lock expire, the lender has options: 1) If the rates have decreased, they can offer you the lower rate 2) If the rates have increased, they can offer you the higher rate. 3) If the rates have increased, but you can still get the same rate for a higher discount costs, this can be offered.
(Normally, if the interest rates have increased and the rate-lock has expired, the borrower must be re-qualified at the higher interest rate. There are times that due to the higher interest rates, a borrower no longer qualifies for the loan and must look at other alternatives)
4) If the rate is the same, you made out. Your rate-lock (loan) is "Pre-Sold" to an investor pool through an agreement with them based on the lock-in terms. The agreement expires at the same time the lock-in rate expires and the lender may not be able to sell that rate-lock to another investor at the rate, term, etc. as it was originally entered into.
