Loan Locks – When is the Best Time to Lock a Loan?
What Does it Mean to Lock a Loan?
By Elizabeth Weintraub, About.com Guide
Let’s say you decide to wait. You’ve narrowed down where you will get a mortgage and looked at all your loan choices. Maybe you’ve even decided on the loan product you want. But the market is moving down. The Fed has cut rates twice and you expect them to drop further. So you decide not to lock.
It’s a gamble. But if rates go up, you have absolutely no protection. You’re going to pay the higher rate.
What are the main elements to loan locks?
When deciding to lock a loan, there are 3 points to consider:
- Interest rate
- Points
- Length of the lock period
Borrowers will pay extra for an extended loan lock. It’s not free. The interest rate will be a bit higher or the points will reflect the loan lock fee. That’s because the lender is taking on the risk that 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. But locking the loan gives the borrower peace of mind. Real estate experts recommend that borrowers lock.
Are you committed to that loan if you lock?
Locking in the rate does not mean the borrower is wedded to that lender. The borrower is actually free to go elsewhere for a loan if the rates go down by the time the transaction is ready to close. Most borrowers don’t realize this little known fact. That’s because lenders don’t want to tell anybody. They don’t want to lose a loan by encouraging a borrower to jump ship.
But if rates go down, and the borrower threatens to pull the loan, to go to another lender, generally the lender will renegotiate the interest rate. Why would the lender do this? Because the lender wants to keep its customers.
How are loan-lock rates figured?
A 30-day rate lock might cost the borrower one-half of a point; whereas a 60-day rate lock might cost one full point. These fees are not paid up front; they are paid at closing. So if the loan never closes because the borrower has changed her mind or gone elsewhere, the fees are never paid. If a borrower doesn’t want to pay for the loan lock through points, the fee can be computed into the interest rate.
Is there a downside?
There is rarely a reason not to lock a loan. Interest rates change daily, sometimes hourly. To protect yourself against the volatility of the marketplace, it’s a good idea to lock your rate once you are satisfied with the rate. The reason some buyers dislike loan locks is because they want to grind every dime out of a transaction that is humanely possible. Just remember that if the rate was acceptable when it was locked three weeks ago, a drop of an 1/8 of a point or so isn’t the end of the world. You don’t need to be that kind of borrower to get a good deal.
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Loan Preapproval vs. Prequalified
Pre-approval Letters Give Homebuyers an Edge
By Elizabeth Weintraub, About.com Guide
- Save Time by Looking at the Right Homes
If your real estate agent is sending you automatic e-mail listings of available homes, you can ask her to change the parameters to more tightly encompass theselection of homes that you are qualified to buy. If you’re not receiving e-mails from your agent, ask her to send them to you. Most MLS systems allow an agent to send clients much of the same data that agents receive. This way, you’ll save time by checking out homes you can actually afford to buy instead of falling in love with pie in the sky. - Spend More Time Examining the Right Homes
By decreasing the inventory of homes to those that fit your parameters, you can allot more time to thinking about all the little nuances each home has to offer. Lots of home buyers never move past the price point when sorting out their preferences, but now you can devote your energies to looking at the little things that matter to you most such as whether your SUV will pass through the overhead space in the garage or smash into the microbeam. - Gain Confidence & Avoid Disillusionment
Now when you find that perfect home, nobody can take it away from you by telling you that you do not qualify to buy it. You can minimize anxiety and remove last-minute loan surprises that could disqualify you. You’ll sleep better at night knowing that the home you selected is yours. Moreover, you can tell your relatives and friends that the home you made an offer is definitely going to close and you will not “lose face” with anybody. - Increase Bargaining & Negotiating Power
Sellers will be more likely to immediately accept your offer, even if that offer is for less than list price, because you are giving the seller peace of mind that her home is sold. She can take her home off the market and place it into pending status with confidence. - Enjoy a Faster Closing Period
Because there is no window period while your loan application is processed, the lender can speed up the entire processing procedure. Appraisals can be ordered immediately. It’s possible to shorten a 30-day closing to two or three weeks, which comes in handy if a seller needs to quickly move and can’t decide which offer to accept. Yours will move to the front if you can accomplish the seller’s need to quickly close.
Because mortgage approval is generally the longest contingency to satisfy in a purchase contract, it is to your advantage to obtain a preapproval letter as soon as you’re ready to begin your search. Lenders will render a decision based on your complete loan application, employment verification and data from all three credit reports.
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Mortgage Broker Answers to Your Interview Questions
By Elizabeth Weintraub, About.com Guide
After you interview your mortgage broker or lender and ask the tough questions, what do you do with the answers? How do you know if the answers you receive are applicable to your situation? Here are the answers acceptable to most borrowers.
1. Answers to Which Type of Loan is Best
Interest-only loans are a popular option if you decide to stay in the property for a long period of time, more than five years. Otherwise, the property may not appreciate enough to provide you with adequate equity to sell if you choose this option for a short-term residency.
2. Answers to Interest Rate & APR
Typically, the costs of your loan over the maximum length of the loan are figured into theannual percentage rate (APR). If a lender advertises an APR identical to the interest rate, you are paying a higher interest rate than the market will bear.APR rates are higher than interest rates because they include costs. If you see a significant spread between the APR and interest rate, you are being charged too much for the loan. Normal spreads for a loan at par (zero points) are generally less than .5.
3. Answers to Discount / Origination Fees
If you do not plan to occupy the property for at least two to three years, do not pay points because you will probably not recoup them over the monthly payment savings.If you do decide to pay points, figure out the difference in the monthly payment without points versus the monthly payment with points. Divide that difference into the points charged, and the answer will tell you how many months it will take before you will break even.
4. Answers to Loan Costs
All mortgage loans cost money. If you are not paying the costs upfront, they are rolled into your loan, making your loan balance larger. There is no such animal as a no-cost mortgage, except maybe a loan from the Bank of Mom and Dad.Ask for an explanation of each fee. Some fees are “garbage fees,” and a way for the lender to make extra money. You can negotiate those fees or persuade a lender to waive them if you threaten to take your business elsewhere.
5. Answers to GFE Guarantee
Some lenders do not guarantee a Good Faith Estimate (GFE) because they will say the costs could change depending on whom you select for third-party services such as title, escrow, etc. Which is true, in part. But you can ask them to guarantee everything BUT your third-party fees.If you are under contract to buy a home, the lender will know who the third-party vendors are and can completely guarantee the GFE. If the lender refuses, walk away.
6. Answers to Loan Rate Locks
Most lenders will not charge a fee for a 30-day loan lock. Some will lock your loan even if you haven’t yet found a property to purchase, but typically lenders will want you to give them a property address to lock your rate.Get the rate lock in writing. Although you are not obligated to use the lender if interest rates fall, generally a lender will lower the rate at that point in exchange for keeping you as a customer. However, if rates go up, you are protected against a rate increase. In most instances, it’s a good idea to lock your loan.
7. Answers to Prepayment Penalties
There are two types of prepayment penalties: soft and hard. Soft prepays mean you cannot refinance the property without paying a penalty — generally six-months of interest — to the lender. But you can sell without a prepay.Hard prepayment penalties do not allow you to sell or refinance without paying a penalty for a certain period of time. Unless you are certain you will not move and rates will not drop during that time, do not accept a loan with a prepayment penalty.
8. Answers to In-House Funding
While I am not suggesting that lenders who do not underwrite their own loans in-house should be avoided — which is far from the truth — there is a distinct advantage to using a lender who does. The reason is the lender’s loan officers are familiar with their own underwriting guidelines and are likely to package a loan that will pass underwriting without any conditions or surprises.Moreover, some lenders approve borrowers based on running the loan application and verifications through an automated software process, which gives borrowers peace of mind, especially if ratios are tight.
9. Answers to Funding Time Frame
Agents like to think they pick the date to close, but in reality, it is the lender’s call. Before you write an offer to buy a home, coordinate the closing time with your lender. Know that funds from you will need to be delivered a few days before closing.To prevent problems at closing, try to use a lender who can fund and turnaround your loan within 24 to 48 hours after receipt of signed loan documents.
10. Answers to Yield Spread Premium
Once the mortgage broker has selected a lender for you, the yield spread premium is a known factor. Sometimes mortgage brokers do not tell you about that fee until it is time to close, when it is often too late for you to back out.
Mortgage brokers deserve to be paid a commission for finding you a good interest rate and terms; however, how much is paid to the mortgage broker is negotiable. Personally, I would rather pay a point upfront, which is tax deductible, for a lower interest rate than find out my rate could have been even lower if the lender was not paying a bonus to the broker.
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Where to Get a Mortgage
Most home buyers finance real estate, which means almost all home buyers will need to get a real estate loan. So what are your lending choices? Where can you get a real estate loan? Which type of real estate lender is best?
Unfortunately, there is no pat answer because the best choice for you depends on your personal situation, the type of property you want to buy and how the lender’s rates compare within the lending community. You can get a loan from a variety of sources such as:
Mortgage Brokers
More than half of all the real estate loans made in the United States originate from mortgage brokers. A mortgage broker is a middle-person who brings together lenders and borrowers. Mortgage brokers each work with different lenders, sometimes 200 or more. It’s important to ask about the variety of products offered as this will vary from broker to broker. Your choices are dependent on the broker’s number of working relationships.
- Fees are paid by the buyer or lender or both.
- Loans at “par” mean the buyer is not paying a fee.
- Yield-spread premiums (YSPs) are typically disclosed at closing and paid by the lender.
- Mortgage brokers can also operate as “up-front” mortgage brokers, meaning they will negotiate a fee directly with the buyer in exchange for shopping for the lowest (wholesale) interest rate & fees.
Mortgage Bankers
Mortgage bankers, as you may have guessed, work for a bank. They may represent more than one bank but the loans they make are bank loans, funded by the bank.
- Fees are generally not negotiable and are set by bank policy.
- Loan products are limited to those the bank offers.
- The banker may not be licensed.
Commercial Banks
Citigroup, Bank of America, and Wells Fargo are good examples of well known commercial banks. Commercial banks offer a wide variety of services. In fact, you probably have a bank like this in your neighborhood.
- Primary source of business is not making mortgage loans.
- Bank rates are competitive.
- Your bank may offer a discount or incentive on your loan if you maintain a checking or savings account at that institution.
Savings & Loan Associations
Savings and loans accept deposits from customers into savings / money market accounts and pay interest on those accounts. To prevent a relapse like the S&L crisis in the 1980s, President Bush in 1989 signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Many savings and loans are now regulated by the Department of U. S. Treasury, Office of Thrift Supervision.
- Primary source of business is making real estate loans.
- Savings and loans do not make business or commercial loans but lend for construction, purchase or home improvement purposes.
- The process for obtaining a mortgage is a bit easier than going to a commercial bank.
Credit Unions
These institutions are regularly under attack by lending competitors because credit unions do not pay federal taxes and enjoy certain taxable advantages that other lending institutions do not. They are formed by a group of individuals with a common interest such as state government and community education employees or religious groups.
- Customers must meet qualifications to be eligible for membership.
- Interest rates and terms are typically very attractive and competitive.
- Many credit unions do not sell their mortgage loans on the secondary market.
Anybody with money in the bank can make a real estate loan to you as long as they comply with federal and state regulations regarding such items as interest rates, fees and charges, and provide legally required disclosures.
- The seller can carry back common financing instruments such as a mortgage, trust deed or land contract.
- No appraisal or title policy may be required, but you should still obtain an appraisal and title protection.
- Owner financing works best on properties that are free and clear because an existing loan will most likely contain an alienation clause.
Stock Brokerages & Online Lenders
You might be astonished to learn that the company handling your IRAs or mutual funds or online savings also makes mortgage loans. A few easily recognizable names are HFC Home Loans, INGDirect, Charles Schwab, and Ditech.
- If you need to shake hands with your loan officer in person, an online lender might not be for you.
- Internet lenders seem to work best for sophisticated borrowers with great FICO scoreswho know exactly what they want.
- Contact only reputable and known companies with secure sites, and stay away from fly-by-night operators.
- Click to go to page two… Mortgage Broker Answers to Your Interview Questions
