When you are ready to buy a home, the first thing that comes to your mind is the word mortgage. You want to look at different lenders for the best interest rate, the lowest points and other up front charges. Now that you have chosen a lender and are about to settle with them, have the terms and conditions that you wanted been applied? For instance, did you get the rate that you wanted? Have your costs gone up? This is when you should be aware of “Lock-In”. You want to lock in on rates and points to make sure that what you wanted is what you actually get. The different parts to this article, parts 1-10 will explain the basics of mortgage Lock-Ins. The entire article can be found at www.debtkiller.com. Look for the article titled Mortgage Lock-Ins.

Part 1

This is part one of a nine part article on the understanding of Mortgage Lock-Ins.

Lock-Ins

Usually the terms that are quoted to you when you were looking for a lender only represent the terms available to borrowers settling their loan agreement at the time of the quote. Quoted terms may not necessarily be available to you when you settle weeks or months later. Do not rely on terms quoted to you when you are looking for a loan unless the lender is willing to offer you a lock-in.

What is a Lock-In?

This is known as a rate-lock or rate commitment. This is a lenders promise to hold a certain interest rate and points for you for a specified period of time while your loan application is being processed. What are points? Points are usually additional charges that a lender charges that are prepaid by you the consumer at settlement but can sometimes be financed by adding them to the mortgage amount. One point equals one percent of the loan amount. Most lenders allow you to lock in the interest rate and number of points that you will be charged when you file your application, or during the loan processing time, or when the loan is actually approved, or even later.

When you are getting a mortgage, the loan processing time takes time. It is good to have a Lock-In because of the time it does take to do all the paperwork. It will take time to prepare the note, document the note and evaluate your loan application. It is during this time that the cost of the mortgage usually can change. However, with a Lock-In, your interest rate and points will not change. The Lock-In should protect you of any increases and allow you to see if you can afford the mortgage. You must also be aware that a Lock-In could also prevent you from price decreases, should they occur. Only your lender will be able to undo the Lock-In, should prices decrease, and give you the lower rate that becomes available during your application period.

Also be aware that a Lock-In is not the same as a loan commitment. However, some loan commitments may contain a Lock-In. What is a loan commitment? A loan commitment is when a lender promises to make you a loan in a specific amount at some future time. This occurs after you have been approved by the lender from a loan application in which you submitted. The loan commitment will state the terms of the loan and that you have been approved. It will state how long the commitment is valid and it will state the lender’s conditions for making the loan. Some conditions might be a receipt of a satisfactory title insurance policy protecting the lender.

This is part two of a nine part article on the understanding of Mortgage Lock-Ins.

Do I need the Lock-In to be in Writing?

Most lenders have preprinted forms that spell out the exact terms of the Lock-In agreement. Some lenders may only give you an oral Lock-In which is promised to you on the telephone or at the time you are filling out the application. Oral agreements are usually difficult to prove should a dispute arise. So it is always best to get the Lock-In in writing.

When you get a Lock-In form, take the time to read it. It just may contain some crucial information that you do not understand or it is written in fine print. For instance, a Lock-In could become void through some unrelated action such as a change in the maximum rate for Veterans Administration guaranteed loans. Ask for a blank Lock-In form and read it carefully before you apply for the loan. If you can, take it to a lawyer to read. Make sure that you completely understand what the Lock-In form is saying. 

This is part three of a nine part article on the understanding of Mortgage Lock-Ins.

Is a Fee charged for a Lock-In?

Some lenders do charge a fee for doing a Lock-In. They can charge an up-front fee and may not allow it to be refundable should you change your mind on the mortgage application and decide not to do the mortgage. Some lenders do not refund this fee also if you are denied credit or if you do not close on the loan. Some lenders charge the fee at the time of settlement. This fee can 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 is up to each lender. It could also depend on the length of the Lock-In period.

This is part four of a nine part article on the understanding of Mortgage Lock-Ins.

How is my Interest Rate and Points Determined?

Locked-In Interest Rate and Locked-In Points are done by the lender. They allow you to Lock-In both the points and interest rate that was quoted to you. This is also considered a true Lock-In because your mortgage terms should not increase above the interest rate and points that you have agreed upon, even if the market conditions change.

You could also be given a Locked-In Interest Rate-Floating Points. This is when the lender allows you to Lock-In the interest rate while permitting the points to rise and fall with changes in the market, also known as floating. Points rise and fall as interest rates rise and fall. So even if you float your points, the lender may allow you to Lock-In points at some time before settlement at whatever level is then current. If you float your points and the market interest rate increase by the time of settlement, the lender can charge a greater number of points for a loan at the rate you did the Lock-In. Beware, you can lose money on this as you will have higher up-front costs.

Example: Let’s say you Lock-In a 10% interest rate but not the 3 points that went with that rate. A month later, the market interest rate is the same but the points the lender charges for that rate have dropped to 2 ½. With the lender’s agreement, you can Lock-In the lower 2 ½ points.

A third option is Floating Interest Rate-Floating Points. This allows the lender to let you Lock-In the interest rate and the points at some time after application but before settlement. If you rates will remain level, or fluctuate up or 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.

There may be more options than these. Check with your lender and find out if others are available.

This is part five of a nine part article on the understanding of Mortgage Lock-Ins.

How Long are Lock-Ins Valid?

A lender will usually promise to hold an interest rate and number of points for a certain number of days. To get the specified terms, usually requires that you settle on the loan within that period. Lock-Ins of 30 to 60 days are very common. Some may only offer it for 7 days, after your loan is approved. Some may offer it for 120 days. Usually the fee may be higher the longer the time period is for the Lock-In. The Lock-In period should be long enough for settlement and other contingencies that are imposed by the lender before the Lock-In expires. You should find out how long it takes to process loans in your area. Ask the lender to give you an estimated time in writing. Ask them to include delays that may arise in providing materials about your financial condition and if you are building a new home, possible construction delays. Ask for a Lock-In with as few contingencies as possible. This will help you in deciding the length of Lock-In time you may need.

This is part six of a nine part article on the understanding of Mortgage Lock-Ins.

What Happens If the Lock-In Period Expires?

If you do not settle within the Lock-In period, you might lose interest rate and the number of points you had Locked-In. This happens when delays occur in processing in which you are the cause. It could also happen if others are involved in the settlement process, or it could be the cause of the lender. Should your Lock-in expire, most lenders will offer the loan based on the prevailing interest rate and points. If the cause of the delay was due to the market conditions, the lender may charge you more for the loan. Lenders also may not be able to continue to offer you the Lock-In rate due to they can no longer sell the loan to investors at the Lock-in rate. Loan approval delays can cause Lock-In period to expire. Sometimes lenders have to wait on documents by you or from others such as employers, appraisers, termite inspectors, builders, and individuals selling the home. Sometimes it is the lenders fault for the delay if the loan demand is heavy. Interest rates falling suddenly also could cause delay. When lenders lock in loan terms for you, they often have an agreement with investors to buy the loan based on the Lock-In terms. This agreement may expire around the same time that the Lock-In rate expires and the lender may be unable to afford to offer the same terms if the market rates have increased. Lenders who intend to keep the loans they make have more flexibility in these cases where settlement is not reached before the Lock-in expires.

This is part seven of a nine part article on the understanding of Mortgage Lock-Ins.

What are some questions to ask your lender about Lock-Ins?

1. Does your lender even offer a Lock-In of the interest rate and points?
2. When will the lender allow you to Lock-In the interest rate and points? When you apply for the loan or when it is approved?
3. Will the Lock-In be in writing? If not, can you ask for it in writing?
4. Does your lender charge a fee to Lock-In your interest rate? Will the fee increase if you have a longer period? How much is the increase?
5. If you have Locked-In a rate and the lender’s rate drops, can you Lock-In at the lower rate? Will there be an additional fee for doing this?
6. Can you float your interest rate and points now and lock them in later?
7. How long will it take you to process your loan?
8. What is their average time for processing loans?
9. Has the lender’s loan volume increased? Heavy volume may increase the lender’s average processing time.
10. What rate will be charged if the Lock-In expires before settlement? Will it be the same rate in effect when the Lock-In expires?
11. If you do not settle with-in the Lock-In period, will the lender refund some or all of your application or Lock-In fees if you decide to cancel their application?
12. If the Lock-In expires, and you want another Lock-In at the rate in effect at the time of the expiration, will the lender charge additional fees for second Lock-In?

This is part eight of a nine part article on the understanding of Mortgage Lock-Ins.

Things you should Know about Lock-Ins

You need to know what to look for so you can make a good decision on what it is that you want to do. You need to know if a Lock-In is best for you. This can keep your loan process moving and can lessen the chance that your Lock-In will expire. But if it does expire and you feel the lender is at fault or someone else involved in the loan process, try to reach a mutual satisfactory agreement with the lender. If this does not work, send a letter to your state or federal regulatory agency.

Some lenders offer Lock-In terms which are impossible to fulfill and therefore fail to process your loan diligently or cause the Lock-In to expire. You may have contractual rights under your Lock-In, consult with an attorney. Be aware that any complaint you have may not be resolves as quickly as may be necessary for a home purchase. There are state and federal agencies available for your protection.

Listed below are some of the State and Federal agencies designed to help you should you feel that you have been defrauded by a lender due to a Lock-In. The information contained in this brochure is intended to help you ask the right questions when shopping for a loan.  It is not a replacement for professional advice.  Talk with mortgage lenders, real estate agents, attorneys, and other advisors, about lending practices, mortgage instruments, and your own interests before you commit to any specific loan. Ask your lender or real estate agent for the following related pamphlets:

• A Consumer’s Guide to Mortgage Refinancings
• A Consumer’s Guide to Mortgage Settlement Costs
• Consumer Handbook on Adjustable Rate Mortgages

This and many other helpful consumer articles may be found at www.debtkiller.com or by reviewing Janna’s many regular personal financial updates at her blog, http://jannajones.blogspot.com

This is part nine of a nine part article on the understanding of Mortgage Lock-Ins.

Federal Agencies

Mortgage Companies

Division of Credit Practices

Bureau of Consumer Protection

Federal Trade Commission

601 Pennsylvania Avenue, N.W.

Washington, D.C. 20580

(202) 326-3224

Federally Insured Savings and Loan Institutions and Federally Chartered Savings Banks

Office of Thrift Supervision 

1700 G Street, N.W.

Washington, D.C. 20552

(202) 906-6000

State Member Banks of the Federal Reserve System

Division of Consumer and Community Affairs

Board of Governors of the Federal Reserve System

20th and C Streets, N.W.

Washington, D.C. 20551

(202) 452-3946

National Banks

Compliance Management Division

Office of the Comptroller of the Currency

250 E Street, S.W.

Washington, D.C. 20219

(202) 874-4810

Federally Insured Non-Member State-Chartered Banks and Savings Banks

Office of Consumer Programs

Federal Deposit Insurance Corporation

550 Seventeenth Street, N.W.

Washington, D.C. 20429

(800) 424-5488 (202) 898-3536

Federal Credit Unions

National Credit Union Administration

1776 G Street, N.W.

Washington, D.C. 20456 (202) 357-1065