 A
CONSUMERS GUIDE TO MORTGAGE RATE LOCKS
When
you're looking for a mortgage, you're likely to shop among
lenders for the most favorable interest rate, and the lowest
points and other up-front charges. When you find the most
favorable terms and the lender that you want, you'll apply to
that lender. But when you get to settlement, will you actually
receive the terms you applied or bargained for? Or will you find
that the rate has changed - and that your costs have gone up?
Lock-ins on rates and points might offer you a way to ensure
that what you shop for is what you get. This page explains what
these arrangements mean.
In
most cases, the terms you are quoted when you shop among lenders
only represent the terms available to borrowers settling their
loan agreement at the time of the quote. The quoted terms may
not be the terms available to you at settlement weeks or even
months later; therefore, you could not rely on the terms quoted
to you when shopping for a loan useless a lender is willing to
offer a lock-in.
A
lock-in, also called a rate-lock or rate commitment, is a
lender's promise to hold a certain interest rate and points for
you, usually for a specified period of time, while your loan
application is processed. (Points are additional charges imposed
by the lender that are usually pre-paid by the consumer at
settlement but can sometimes be financed by adding them to the
mortgage amount. One point equals 1 percent of the loan amount.)
Depending upon the lender, you may be able to lock in the
interest rate and n umber of points that you will be charged
when you file your application, during processing of the loan,
when the loan is approved, or later.
A
lock-in that is given when you apply for a loan may be useful
because it's likely to take your lender several weeks or longer
to prepare, document, and evaluate your loan application. During
that time, the cost of your mortgage may change. But if your
interest rate and points are locked in, you should be protected
against increases while your application is processed. This
protection could affect whether you can afford the mortgage.
However, a locked-in rate could also prevent you from taking
advantage of price decreases, unless your lender is willing to
lock in a lower rate that becomes available during this period.
It is important to recognize that a lock-in is not the same as a
loan commitment, although some loan commitments may contain a
lock-in. A loan commitment is the lender's promise to make you a
loan in a specific amount at some future time. Generally, you
will receive the lender's commitment only after your loan
application has been approved. This commitment usually will
state the loan terms that have been approved (including loan
amount), how long the commitment is valid, and the lender's
conditions for making the loan such as receipt of a satisfactory
title insurance policy protecting the lender.
Some
lenders have pre-printed forms that set out the exact terms of
the lock-in agreement. Others may only make an oral lock-in on
the telephone or at the time of application. Oral agreements can
be very difficult to prove in the event of a dispute. Some
lenders' lock-in forms may contain crucial information that is
difficult to understand or that is in fine print. For example,
some lock-in agreements may become void through some unrelated
action such as a change in the maximum rate for Veterans
Administration-guaranteed loans. Thus, it is wise to obtain a
blank copy of a lender's lock-in form to read carefully before
you apply for a loan. If possible, show the lock-in form to a
lawyer or real estate professional.
It
is wise to obtain written, rather than verbal, lock-in
agreements to make sure that you fully understand how your
lender's lock-ins and loan commitments work and to have a
tangible record of your arrangements with the lender. This
record may be useful in the event of a dispute.
Lenders
may charge you a fee for locking in the rate of interest and
number of points for your mortgage. Some lenders may charge you
a fee up-front, and may not refund it if you withdraw your
application, if your credit is denied, or if you do not close
the loan. Others might charge the fee at settlement. The fee
might be a flat fee, a percentage of the mortgage amount, or a
fraction of a percentage point added to the rate you lock-in.
The amount of the fee and how it is charged will vary among
lenders and may depend on the length of the lock-in period.
Lenders
may offer options in establishing the interest rate and points
that you will be charged, such as:
- Locked-in
interest rate/locked-in points
Under this option, the lender lets you lock in both the
interest rate and points quoted to you. This option may be
considered to be a true lock-in because your mortgage terms
should not increase above the interest rate and points that
you've agreed upon even if market conditions change.
- Locked-in
interest rate/floating points
Under this option, the lender lets you lock in the interest
rate, while permitting or requiring the points to rise and
fall (float) with changes in market conditions. If market
interest rates drop during the lock- in period, the points
may also fall. If they rise, the points may increase. Even
if you float your points, your lender may allow you to lock
in the points at some time before settlement at whatever
level is then current. (For instance, say you've locked in a
10.5 percent interest rate, but not the 3 points that went
with that rate. A month later, the market interest rate
remains the same, but the points the lender charges for that
rate have dropped to 2.5. With your lender's agreement, you
could then lock in the lower 2.5 points.) If you float your
points and market interest rates increase by the time of
settlement, the lender may charge a greater number of points
for a loan at the rate you've locked in. In this case, the
benefit you might have has by locking in your rate may be
lost because you'll have to pay more in up-front costs.
- Floating
interest rate/floating points
Under this option, the lender lets you lock in the interest
rate and the points at some time after application but
before settlement. If you think that rates will remain level
or even go down, you may want to wait on locking in a
particular rate and points. If rates go up, you should
expect to be charged the higher rate. Because practices
vary, you may want to ask your lender whether there are
other options available to you.
Usually
the lender will promise to hold a certain interest rate and
number of points for a given number of days, and to get these
terms you must settle on the loan within that time period.
Lock-ins of 30-60 days are common. But some lenders may offer a
lock-in for only a short period of time (for example, seven days
after your loan is approved) while some others might offer
longer lock-ins (up to 120 days). Lenders that charge a lock-in
fee may charge a higher fee for the longer lock-in period.
Usually, the longer the period, the greater the fee.
The
lock-in period should be long enough to allow for settlement,
and any other contingencies imposed by the lender, before
lock-in expires. Before deciding on the length of the lock-in to
ask for, you should find out the average time for processing
loan s in your area and ask your lender to estimate (in writing,
if possible) the time needed to process your loan. You'll also
want to take into account any factors that might delay your
settlement. These may include delays that you can anticipate in
providing materials about your financial condition and, in case
you are purchasing a new house, unanticipated construction
delays. Finally, ask for a lock-in with as few contingencies as
possible.
If
you don't settle within the lock-in period, you might lose the
interest rate and the number of points you had locked-in. This
could happen if there are delays in processing whether they are
caused by you, others involved in the settlement process, or the
lender. For example, your loan approval could be delayed if the
lender has to wait for any documents from you or from others
such as employers, appraisers, termite inspectors, builders, and
individuals selling the home. On occasion, lenders are
themselves the cause of processing delays, particularly when
loan demand is heavy. This sometimes happens when interest rates
fall suddenly. If your lock-in expires, most lenders will offer
the loan based on the higher of the prevailing interest rate and
points, or your locked in rate. If market conditions have caused
interest rates to rise, most lenders will charge you more for
your loan. One reason why some lenders may be unable to offer
the lock-in rate after the period expires is that they can no
longer sell the loan to investors at the lock-in rate. (When
lenders lock in loan terms for borrowers, they often have an
agreement with investors to buy these loans based on the lock-in
terms. That agreement may expire around the same time that the
lock-in expires and the lender may be unable to afford to offer
the same terms if market rates have increased.) Lenders who
intend to keep the loans they make may have more flexibility in
those cases where settlement is not reached before the lock-in
expires.
While
the lender has the greatest role in how fast your loan
application is processed, there are certain things you can do to
speed up its approval. Try to find out what documentation the
lender will require from you.
Much
of the information required by your lender can be brought with
you when you apply for a loan. This may help to get your
application moving more quickly through the process. When you
first meet with your lender, be sure to bring the following
documents .
- The
purchase contract for the house (if you don't have the
contract, check with your real estate agent or the seller).
- Your
bank account numbers, the address of your bank branch and
your latest bank statement, plus pay stubs , W-2 forms, or
other proof of employment and salary, to help the lender
check your finances.
- If
you are self-employed, balance sheets, tax returns for two
to three previous years, and other information about your
business.
- Information
about debts, including loan and credit card account numbers
and the names and addresses of your creditors.
- Evidence
of your mortgage or rental payments, such as cancelled
checks.
- Certificate
of Eligibility from the Veterans Administration if you want
a VA-guaranteed loan. Your lender may be able to help you
obtain this.
Be
sure to respond promptly to your lender's request for
information while your loan is being processed. It is also a
good idea to call the lender and real estate agent from time to
time. By calling occasionally, you can check on the status of
your application, and offer to help contact others such as
employers who may need to provide documents and other
information for your loan. It is also helpful to keep notes on
your contacts with the lender so that you will have a record of
your conversations.
When
you're ready to settle on your loan, you'll want to get the loan
terms that you've locked in. To increase that likelihood, it is
important to learn as much as you can about what the lender is
promising you before you apply for a loan. Ask for the following
information when shopping for a loan:
- Does
the lender offer a lock-in of the interest rate and points?
- When
will the lender let you lock in the interest rate and
points? When you apply? When the loan is approved?
- Will
the lock-in be in writing? If the lock-in is not in writing,
you will have no record of the lender's agreement with you
in case of a dispute.
- How
long will the lock-in last (30, 60, 90, 120 or more days)?
- Does
the lender charge a fee to lock-in your interest rate? Does
the fee increase for longer lock-in periods? If so, how
much?
- If
you have locked in a rate, and the lender's rate drops, can
you lock-in at the lower rate? Does the lender charge you an
additional fee to lock in the lower rate?
- Can
you float your interest rate and points for now, and lock
them in later?
- How
long does the lender expect to take to process your loan?
- What
has been the lender's average time for processing loans
recently?
- Has
the lender's loan volume increased? Heavy volume might
increase the lender's average processing time.
- What
rate will be charged if the lock-in expires before
settlement-the rate in effect when the lock-in expires?
- If
you don't settle within the lock-in period, will the lender
refund some or all of your application or lock-in fees if
you decide to cancel the loan application?
- If
your lock-in expires and you want to get another lock-in at
the rate in effect at the time of the expiration will the
lender charge an additional fee for the second lock-in?
Knowing
what to look for puts you in a better position to decide
whether, when, and how long to lock-in mortgage terms and, by
helping to keep the loan process moving, you can lessen the
chance that your lock-in will run out before settlement. But
what i f your lock-in does lapse? If you believe that the lapse
was due to delays caused by the lender or someone else involved
in the loan process, you should try first to reach a mutually
satisfactory agreement with the lender, if that effort fails,
consider writing to the appropriate state or federal regulatory
agency.
Some
lender actions, such as offering lock-in terms which are
impossible to fulfill, failing to process you loan diligently,
or causing your lock-in to expire are improper and may even be
illegal. In addition, because you may have contractual rights
under your lock-in or loan commitment, you may want to consult
with an attorney. Be aware, though, that complaints may not be
resolved as quickly as may be necessary for a home purchase.
Depending upon their authority under applicable state or federal
law, regulatory agencies may either attempt to help you resolve
your complaint directly or record your complaint and recommend
other action.
State
consumer protection officers, banking authorities, and offices
of the attorney general can be contacted regarding complaints
against many lenders doing business in the state. (Some states
have enacted legislation to specifically address complaints
about mortgage lock-ins.)
In
addition, some lenders are directly supervised by federal
regulatory agencies, as shown in the list that follows:
- Division
of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
601 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
(202) 326-3224
- Office
of Community Investment
Federal Home Loan Bank Board
1700 G Street, N.W.
Washington, D.C. 20552
(202) 377-6000
- Division
of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
(202) 452-3946
- Consumer
Activities Division
Office of the Comptroller of the Currency
490 L'Enfant Plaza, S.W.
Washington, D.C. 20219
(202) 447-1600
- Office
of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth Street, N.W.
Washington, D.C. 20429
(800) 424-5488
(202) 898-3536
- National
Credit Union Administration
1776 G Street, N.W.
Washington, D.C. 20456
(202) 357-1065
The
Federal Reserve Board and the Federal Home Loan Bank Board have
prepared this information on mortgage lock-ins in response to a
request from the House Committee on Banking, Finance and Urban
Affairs and in consultation with many other agencies and trade
and consumer groups. It is designed to help consumers understand
an important aspect of home financing.
We
believe a fully informed consumer is in the best position to
make a sound financial choice. This page will provide useful
basic information about obtaining the terms of credit you really
want. It cannot provide all the answers you will need, but we
believe it is a good starting point.
The
information presented on this page was prepared in consultation
with the following organizations:
- American
Bankers Association
- American
Institute of Real Estate Appraisers
- Comptroller
of the Currency
- Consumer
Federation of America
- Credit
Union National Association, Inc.
- Federal
Deposit Insurance Corporation
- Federal
Home Loan Mortgage Corporation
- Federal
National Mortgage Corporation
- Federal
National Mortgage Association
- Federal
Reserve Board's Consumer Advisory Council
- Federal
Trade Commission
- Independent
Bankers Association of America
- Mortgage
Bankers Association of America
- Mortgage
Insurance Companies of America
- National
Association of Federal Credit Unions
- National
Association of Home Builders
- National
Association of Realtors
- National
Council of Savings Institutions
- National
Credit Union Administration
- Office
of Special Adviser to the President for Consumer Affairs
- Society
of Real Estate Appraisers
- The
Consumer Bankers Association
- U.S.
Department of Housing and Urban Development
- U.S.
League of Savings Institutions
- Veterans
Administration
|
