By: By Dian Hymer
Interest rates dropped at the end of last year after creeping up over the summer, with 30-year fixed-rate mortgages with interest rates below 5 percent readily available.
Mortgage interest rates change as often as two to three times in one day. Securing the lowest rate possible is every borrower's goal. However, it's impossible to time the finance market, just as it's impossible to predict exactly when the housing market will peak or slide.
In this low-interest-rate environment, many buyers are locking in a rate, either when they submit their loan application and purchase contract, or some time before closing. A lock-in is a commitment from the lender to hold an interest rate for a period of time. Points (the lenders original fees) can also be locked.
The length of the rate lock varies from seven days to 60 days and possibly longer. However, it's more expensive for a longer lock -- about 1/8 percent to 1/4 percent in rate or points for each additional 15 days.
Today, it's wise to lock in your rate for 45 days if you lock when you submit your package. With delays due to appraisal issues and lenders asking for additional documentation, it can take this long to close the loan.
There are advantages and disadvantages to locking in a rate. If rates fall after you lock, the lender probably won't give you the lower rate. If rates rise after you lock, the lender should honor the locked rate as long as you close on time.
Some lenders offer a "float down." This would come into play if interest rates were to drop between the lock data and the date your loan documents are drawn. The lender probably won't let your locked rate float down to market rate, but to something in between. A float down is a one-time-only option.
HOUSE HUNTING TIP: Because rate locks have an expiration date, it's essential to provide as much financial documentation needed to qualify you for the mortgage as soon as possible. This will speed up the approval process.
Lenders require much more personal financial information than they did several years ago. Ask your loan agent or mortgage broker at the time you submit your loan application what personal financial data the lender will require -- like pay stubs and information supporting your cash downpayment and cash reserves (in bank accounts, IRAs and 401(k)s. If you're self-employed, you'll need to provide tax returns for the last two years.
After your loan package is submitted to underwriting for approval, there could be other conditions that must be met. If you drag your feet producing additional documentation, this could delay approval and jeopardize your rate lock.
Extensions of rate locks are sometimes granted, but don't count on it. If the delay is due to a slowdown in the lender's processing, the lender might agree to an extension, especially if interest rates haven't changed much. But, if the delay is due to your failure to provide the materials necessary to qualify you for the loan, don't expect a sympathetic ear.
Try to get the lender's rate-lock commitment in writing. Some lenders will do so, but many give only verbal agreements, which are hard to enforce.
Lenders often give processing priority to purchase loans over refinances. If you're refinancing and rates are low but threatening to rise, lock in for 45-60 days.
Now is a great time to refinance not only because interest rates are low, but because there will be fewer home sales during the winter months and less competition to worry about in terms of getting the loan closed on time.
THE CLOSING: Get a copy of the Federal Reserve Board's "A Consumer's Guide to Mortgage Lock-Ins" at http://www.federalreserve.gov/pubs/lockins/default.htm.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author.