Locking a mortgage rate? What you need to know.

If any of you have ever obtained mortgage financing, and then had your rate increase before closing, you may have wondered why the rate changed. You may have even wondered why the person who quoted you the rate deceived you when they may not have intentionally done so. You see, I always make it a practice of full disclosure and choice. 

In general, rates quoted are what are known as floating rates. Floating rates, are unlocked and unprotected rates subject to market conditions, and are the lowest quoted mortgage rates. When your rate is not locked, you are, in effect, “playing the market”.  That means, if you were able to close in 12-15 days, the rate quoted would be the rate you would get ASSUMING that the market remained stable. 

What is unknown when you lock a rate is: Are you going to go past your rate lock? Have rates moved up?  If yes, you may have to incur extension fees in order to keep your rate. If rates moved lower then you are usually allowed to keep your original locked in rate. 

Practically, if the stars align, it is quite possible to close in 15 days on a purchase or refinance, but typically, especially on a purchase, you may take longer.

Why? 

Simply because:

1. There are so many parties involved who have their own schedules (two attorneys, two real estate brokers, one mortgage company, a seller and you the buyer) 
2. There is the possibility that the inspection will reveal items that you may want to negotiate on (going back and forth eats up time), 
3. Title issues may come up such as inherited seller judgments or collections that need clearance before you can close, 
4. or your own schedule may derail you from closing within the rate lock period.

Locked in rates are slightly higher than floating rates, but you avoid market risk, and, as long as you close within the rate lock period, you know what you are getting from the beginning until closing. 

When you qualify for a mortgage, you have to meet underwriting guidelines which take into consideration a qualifying rate.  If you are a borderline applicant, you may have just squeaked by on your approval. Should rates go up, you may lose your commitment, have to reduce your loan amount, or be forced to "buy down" the rate in order to qualify which can run into thousands of dollars. 

In summary, when you lock the rate, and close in the specified rate lock time, you are protecting your mortgage payment, mortgage commitment qualifying loan amount, and shielding yourself from potential rate increases due to market condition changes and/or Lenders raising their rate to stave off excess mortgage applications.

Note: the industry has now implemented TRID. Before closing on your new loan, the lender must send you a Closing Disclosure (CD) 3 days before you close. You will need to lock your loan at least 3 days before closing. Keep this in mind when you lock your loan because if you wait the day before you close to lock your loan, you will not close the next day, but 3 days later because new disclosures have to be sent and may start the clock again.  You may even jeopardize your rate lock.

I suggest, if you choose to wait to lock your rate, that you do so no later than 5 days before closing or earlier if possible to give yourself a cushion.  

Knowing before owing can save you thousands of dollars.  My philosophy is to always set expectations so that there are no disappointments or surprises - which not only helps when it comes to rate quotes - but in all aspects of life as well.