You old market-timer you. You nailed it, didn't you? You waited and waited until the market was just so, timed it just right, then called your lender just before the bell and locked in your loan. Or did you?
Locking in your loan, or specifying a particular interest rate for your mortgage, can be a tricky process. Worse, most lenders have different lock-in procedures and policies.
But what exactly is a lock and how do they work?
When you apply for a mortgage, you're simply applying for a loan, you're not locking anything. Unless your lender requires you to lock upon application, which is rare, applying and locking are two different things altogether. But when you are ready to lock, here are a few things to consider.
Locks typically cover a specific time period, most usually thirty days. When you call a lender for a rate quote, ask how long that rate is good for. If you need more than thirty days, tell your lender how many days you think you'll need, then they'll provide you with a new quote.
Typically, each additional 30 days will cost you, the borrower, perhaps another 1/4 point. Longer term locks are also available, some lenders will lock for up to a year or more, but that can get expensive. In general, most loans close within 30 days, and most locks are for that period as well.
Also check around, because there are no universal locking procedures. Some lenders charge a lock-in fee, some don't. Some ask for an application fee or other charge before allowing you to lock. Some simply ask that you complete an application and still more will simply lock you in over the phone.
Other lenders may accept a lock request but can't guarantee it until the lender also receives a verification from the lender's marketing department. If rates have been volatile as they have lately, what you ask for may not be available until you receive confirmation. Much like placing a stock order.
But be careful. If you locked exactly 30 days ago and are closing on your loan the same day the rate expires, you need to make sure your lock won't expire before the loan is fully documented.
How can this happen? Many times, a lender will ask the closing company to provide them with some documentation at the closing table, perhaps a missing bank statement for example. In this instance, the loan may not be complete until the missing statement is delivered to the lender. The lender will review the statement to make sure it's what they were asking for, then fund the loan -- AFTER the rate has expired.
Make sure you give yourself plenty of time between lock expirations and last minute documentation requests...just because you signed your papers on the same day your lock was set to expire doesn't mean you're home free.
If you have locked in your loan, you should request a lock confirmation, in writing. This confirmation must show the exact note rate, how long the lock lasts, and any points or origination fees. Notice the last item -- if you lock in an interest rate but not points and origination fees then you could have a situation where the rate will be as promised but higher points and fees can be charged. In effect, you'll pay more for your loan, perhaps much more.
Sometimes when working with a mortgage broker, the broker must also comply with certain requirements from the lender. If you use a broker and are requesting a written lock confirmation, ask the broker if the lock time is sufficient to cover the time it takes to process, approve, fund and deliver the complete loan to the lender.
What if you see that your lock will expire before your loan will close? Most likely you will get the higher of whatever you locked in at or current market rates. If rates have dropped dramatically, most lenders and brokers will try and find a way to obtain the lower rates. If rates have gone higher, ask for a lock extension before the rate expires. Many times you can extend your lock for a fee, and if rates have risen considerably, this fee is usually more than justified.
Lock rules will vary from lender to lender and from broker to broker. When deciding upon which mortgage company to use, its' important to be absolutely clear on their lock policy. Does the lender charge to lock in? How long will it take to approve your loan? Understand that all lenders will ask for a little due diligence on your part. If they ask for a paycheck stub, give it to them right away. If they need an account number or something signed, do it right away. Lenders treat locks seriously so be sure you understand all the rules.