|Beware: Donít get burned by mortgage rate locks
Looking for a mortgage loan in Sonoma County, California? Whether buying a home or refinancing a mortgage, your lender will require you to lock your interest rate on the amount being borrowed.
The length of your interest rate is how long you have to close escrow. This is where consumers can often find themselves scrambling to meet the interest rate lock, so the costs associated with financing remain unchanged.
A mortgage rate lock guarantees the interest rate for a set period of time only. As you do your mortgage comparison shopping, you’ll find rate mortgage rate locks vary. The following time frames are common:
• 15 days give you the best possible financing “lowest-cost rate” available in the market on any given day; the loan needs to be approved by underwriting for this type of interest rate lock.
• The 30-day fair market rate, is most commonly used for interest rate locking upfront.
• The 45-day used for transactions taking longer
• 60 days are used in circumstances where the loan is prolonged, such as when one borrower is out of town for a period of time.
The shorter the lock, the less risk the mortgage lender takes in tying up that money. It’s not uncommon to see an interest rate variation by as much as .25 percent on the longer rate locks compared against 15- and 30-day rate locks.
The longer the lock, the more risk the lender takes and the slightly more costly the loan can become, depending on the day you choose to lock in your interest rate.
Lenders are always concerned about interest rate risk. For example let’s say you lock your interest rate today on a 30 year fixed rate mortgage at 3.5 percent for 30 days. If rates rise to 3.75 percent, they’ll make an extra .25 percent margin on the money you’re committing to borrow.
That means if your transaction takes 32 days rather than the locked 30 days, the costs to extend your loan can easily be upwards of half a discount point of the loan amount. Using a $300,000 mortgage loan, an extension fee for an additional period of time can run as high as $1,500.
Be prepared to give the minimum information needed for a lender to provide you a mortgage rate lock. That’s a loan application, pure and simple. Despite what you might hear, you need to provide application to a mortgage lender of your choice in order for them to give you a mortgage rate lock.
This involves: giving your full name; loan product; loan amount; date of birth; Social Security number; employment/income information as well as income and job history; full property address including property type; property occupancy; asset information; and answers on race/ethnic history and credit history.
What to watch for:
• Upfront fees: The fees, such as an application fee to lock your mortgage rate or any other upfront fee (this is the first sign you’re working with a company that cares more about their profit margin than they do your best interest).
• Back Pedaling: If you’re considering working with a mortgage lender who is not up front and transparent about all of your questions, move on. Taking out a mortgage is a significant financial transaction that should be done with a professional.
• Baiting and switching: This does still happen. Ask the lender upfront if you’re being quoted a 15-day rate lock or a 30-day rate lock, if the rate seems too good to be true on a 30-day lock, get it in writing.
• Don’t be afraid: Don’t fear letting your mortgage lender know you’re shopping around and you’re willing to lock in an interest rate you find fair and reasonable. A reputable mortgage lender knows consumers shop for mortgages, forcing them to be competitive.
• Understand lenders: Do know all lenders are under very tight underwriting restrictions from Fannie Mae and Freddie Mac. Put another way, locking in the mortgage rate does not guarantee your loan will actually close escrow.
• Mortgage tip: Get a mortgage rate quote from a lender up front and make sure it’s an interest rate they can pull the trigger on if you say go (i.e. 30-day lock). Be prepared to send to your mortgage company, credit, debt, income and asset information so they can make sure that you can actually qualify for the amount of money you’re looking to borrow. Don’t get burned by mortgage rate locks.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.