Purchasing or refinancing a home requires a certain degree of time, commitment and paperwork. Here is one factor that can make your mortgage more expensive …
The simple answer is time. Time is not on your side when it comes to an escrow. The mortgage process is a very bureaucratic and compliant process and borrowers today are paying for the sins of borrower’s past in terms of compliance and processes. One of those factors that come into play is locking in your mortgage rate. A rate lock essentially means the lender is setting aside $500,000 or however much you are borrowing under set terms. If you can’t deliver on those terms or if you’re unable to provide paperwork or for whatever reason your mortgage cost can change and rise in the form of rate lock extension.
Rate lock extensions can become pricey especially if you must take more than one lock extension. So, for example if you know at the beginning of the process that your file is a little bit more unique and or technical it would be advisable that you lock in your mortgage rate for perhaps 45 days even though that might cost longer than a 30-day rate lock.
Extending the rate lock is something that the lender usually passes on to the borrower, sometimes they will cover it depending on the circumstances. Let’s say you’re getting a 5 percent loan at no points on a 30-day rate lock.
For whatever reason you’re not able to get that loan done in 30 days and the lender charges you an extension on your loan- let’s just say it’s $500 for comparison sake that means now you’re paying an extra $500 in fees for the same interest rate because the loan was not able to be funded in the original time frame committed.
The reason why rate locks are not free is because the lender takes a certain degree of risk locking in your interest rate. For example, if you’re locked at 5 percent using our example above and rates go to 5.5 percent, the value of your loan in the secondary market is not as lucrative for the investor because they would have better use of their money earning 5.5 percent on their investment than 5 percent. As a byproduct of that risk the lender assesses a rate lock extension cost to preserve that original money committed.
The moral of the story is get the paperwork to the lender as quick as possible even if it seems over the top. Over the course of your escrow time frame you need to think of yourself as an on-call professional much like doctors where they get called in on their own time to do things that might otherwise be inconvenient for the greater good.
If you go into the process with that expectation knowing that when the lender needs something you get to them in 24 to 48 hours, not only will your loan close on time, but you’ll keep your costs down without any changes which otherwise might occur as a byproduct of not being able to get documentation into the lender in a timely manner.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.