Mortgage Loan Locks

Due to the nature of interest rate movements, mortgage rates can change dramatically from the day you apply for a mortgage loan to the day you close the transaction.  If interest rates rise sharply during the application process, it could make a borrower’s mortgage payment larger than he/she previously thought.  Using the mortgage payment calculator is an important step for evaluating different mortgage loans and weighing the affordability of a new home loan.  When the mortgage rates used to calculate the payment with the mortgage calculator changes, the results lose their value.  If the rate change is significant and the new payment based on this rate change increases too much there is the chance the borrower may no longer qualify for the loan program.  To protect against this uncertainty, a lender can allow the borrower to lock-in the loan’s interest rate, guaranteeing the borrower the prevailing loan rate for a specified period of time (often 30-60 days). 

A lender may or may not charge a fee for this service.  If interest rates rise while your loan is being processed the loan lock guarantees that initial rate for you as long as you close the loan within the lock time period.  An interest rate lock is an assurance of receiving that rate during the specified period of the loan lock.  You pay a bit more because the lender is taking on the risk that mortgage rates could go up while the transaction is processed, so the lender could end up losing money if the loan is funded at a lower than market interest rate.

 No one knows for sure how interest rates will move at any given time, but your mortgage lender may be able to give you an estimate of where it thinks mortgage rates are headed.  Even when it seems fairly clear as to which direction interest rates may be going, choosing not to lock your interest rate can be risky.  The calendar of economic statistics that impact interest rates is often extraordinarily jam-packed.  If interest rates are expected to be volatile in the near future, you may want to reconsider locking your interest rate if rising mortgage rates will impact your payment materially or you will no longer qualify for the loan.  If your budget can handle a higher loan payment or if the lender’s lock fee seems excessive for your means, you might want to consider allowing the interest rate to float until the loan closing.  Extended rate locks will by and large lead to a slightly higher rate.  Sometimes the rate difference will be negligible and other times it may be more considerable.  Rate locks generally do cost anything until you are requesting a lock greater than 60 days.

In times of stable or dropping rates, the loan lock question and the risk of changing rates diminishes.  In a rising rate environment, loan locks, their costs and lock period become a bigger issue.  Without the loan lock your loan is at the mercy of the interest rate market, which can be volatile and will be unforgiving.  Most borrowers are willing to pay a small and reasonable price for the peace of mind associated with knowing what their interest rate will be at closing.  However, interest rates may continue down, in which case you’ve paid a fee for no good reason.

As a final note, when you rate shop, make sure you know the terms of the loan, the cost of the loan and how long the rate quote you get is good for.  Extensive use of the mortgage calculators can assist is measuring the impact of rate changes and qualification ratios to help measure the impact of rate changes and mitigate their effect.  If you are shopping for a home loan to buy house and expect to close on the transaction 60 days form now, it is of little value to have to compare mortgage rate quotes where one lender tells you it can be locked to cover that 60 day period and the other either does not specify the fact or says it good through a period less than 60 days.  The mortgage calculators and a little bit of knowledge will help you prepare for the entire mortgage process including how to handle rate fluctuations and whether a loan lock is necessary and or beneficial.

Tags: home loan, mortgage calculator, mortgage payment, mortgage payment calculator, mortgage rates

This entry was posted on Friday, March 6th, 2009 at 7:21 am and is filed under Mortgage Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.