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Locking that loan

By Melissa Wirkus

If you are one of the few potential homebuyers who are taking advantage of the current market situations, then you know that financing your new house is one of the hardest parts of the whole transaction.

Taking out a mortgage and buying a home go hand in hand, and it is essential that you understand the mortgage process before you even start.

One of the keys to signing into a good mortgage and to making the whole process a lot less stressful is to lock-in the interest rate on your loan.

Interest rates are completely unpredictable, and actually change daily. Locking your loan will save you from any unplanned surprises when you go to sign the final documents.

An October 11, 2006 article by Elizabeth Weintraub of About.com, “What does it mean to lock a loan?” takes a potential borrower through the various steps of locking a loan.

“When it comes to locking the interest rate on a mortgage loan, everybody wants to time it to get the best deal. There's nothing wrong with that sentiment. It's normal. Some of the time you'll get lucky and some of the time you won't. In other words, it's a roll of the dice. With a locked interest rate, however, you are guaranteed that if interest rates go up by the time you are ready to close, you will pay the lower interest rate.”

When you initially apply for a loan, your mortgage broker or lender will give you an idea of what rates and programs he or she can give you, but you must remember that nothing is set in stone unless you have a rate-lock or you have signed final papers. Until then, anything can happen to your precious interest rate.

If you decide not to lock, you are essentially just making a gamble. Your rate could go up, go down, or stay exactly the same, you just have no way of finding out until the day you actually sign all of the final documents and enact your loan.

Locking a loan can be a hard decision to make especially considering the environment we are in now. The Federal Reserve has finally stopped raising rates, and many analysts expect them to drop even further; but in reality anything could happen.

“When deciding to lock a loan, there are 3 points to consider: Interest rate, points and 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.”

One secret that every borrower should realize is that once you are in a loan lock, you can still go to a different lender for a loan if the rates go down. Most people think they are stuck with a lender if they enter into a loan-lock.

“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 a 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.”