Mortgage Rate Locks: the Good, the Bad, and the Ugly

As interest rates climb, many borrowers are being reacquainted with the “rate lock”.  This is a procedure that freezes your interest rate while the loan is being processed.  Getting that rate fixed can be the difference of affording the home or not.

According to NAR an increase of 1% (yes, only one percent) has historically priced 300,000 to 400,000 would-be buyers out of the market.  In a time when rates are beginning to climb, locking rates becomes a cat and mouse game.  Getting the lowest rate is usually preferable, but caution must be used.

Generally, locking for a shorter time gives a better rate.  Naturally, the temptation is to lock for the shortest period.  However, locking for less time than it takes for your transaction to complete does you no good at all, and may actually hurt you. 

Some lenders may actually charge for an expired lock.  Some have raised the rate slightly above the then current rate to compensate.  Some may start the process over since you are now being qualified with a higher rate.  This might loose the home you were trying to purchase because it also has a deadline for closing.

Recent changes in the TIL (Truth in Lending) requirements have forced a longer closing process.  Other changes, most meant to help protect the purchaser, have also lengthened the time required to close.  Last year’s average close times were 52.1 days, up from 2009’s numbers (46.9 days). This has caused some rate locks to expire.

While most lenders are not charging a fee for requesting an extension, they are bumping the rate by 0.1 to 0.25% for a 15 week extension.  That could mean $400-$1,000 more due on closing AND an increase in monthly payments.

$ Source:  New York Times ð

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