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Home >> Lending >> Home Mortgage
Mortgage Lock-in
If you are considering buying a home right now, given the sharp discount in market prices, one of your concerns, even with impeccable credit, may be your home loan. As you shop from lender to lender for the best deal on interest, points, and fees, you should be aware that the quote they give you in month one may vary drastically from the actual cost six months later when you finally close on the home. This variation could work in your favor if the interest rate is lowered or if the market conditions change. However, the change could just as easily work against you. If you want to make sure the quote you receive is the price you will pay at closing, then you need to speak to your lender about a lock-in.
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What is a Lock-In?
A loan lock-in is very different from a loan commitment. With a lock-in, the lender is agreeing that based on interest rates and market prices, he or she will not charge you more than a set amount of interest or points, even if the loan is not finalized for some time. This lock-in is normally based on a brief review of your credit or some other criteria, before the actual loan process has started. At this point, the lender has not committed to loaning you money; he or she has only promised that if a loan is made, it will meet these terms. Neither you nor the lender must follow through with a loan. Keep in mind that this is different from a loan commitment. A loan commitment is a promise by the lender that he or she will loan you a specific amount of money over a specific term of years.
What are the Advantages of a Lock-In?
The advantage to a lock-in is fairly straightforward. You know in advance your interest rates and points, so you can make a reasonable decision about how much house you can afford. If the interest rate goes up or market conditions improve, then you will not be affected.
What are the Disadvantages?
Just as the lock-in protects you from rate increases, it also keeps you from taking advantage of lower rates as well. To determine whether a lock-in is a good option for you, look at the current market and financial conditions. If the interest rate is low, then a lock-in is advantageous. If the interest rate is high, perhaps you should wait to lock-in your rate.
Another disadvantage is that the lender may charge you a fee for the lock-in. This fee may be payable upfront and non-refundable, even if you do not take out a loan. The fee could also be added at closing cost-as a flat fee, a percentage of your loan, or a fraction of a point.
How Long is a Lock-In Valid?
The length of time a lock-in will be valid will vary depending on the lender. The average time is 30-60 days, although the time may be shorter or much longer. Sometimes, the length of your lock-in will determine your fee-the longer the lock-in, the higher the fee-although lenders vary in their policies and charges.
What Type of Lock-In is Available?
Several types of lock-ins are available. You could have a locked in interest rate and locked in points, which means that you know all the fees associated with the mortgage. You could also have a lock-in interest rate with floating points, which means that although the bank cannot change your interest rate, the points will change based on market conditions. Another option is to have floating interest rates and floating points, which means that the lender will allow you to lock-in a rate after approval but before settlement. This is a good option if you expect the market value to decline or that interest rates will be lowered.
When shopping for a mortgage loan, you have a lot of considerations. Asking about a lock-in will minimize some of your concerns by helping you determine exactly how much of a loan you can afford.
Published on BankingQuestions.com 3/17/09
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