If you are shopping for mortgage rates you might be wondering if and when you should lock your mortgage rate. Lock at the wrong time and you risk mortgage rates going down.
Lock for too short a period of time and you might not have time to close on the mortgage before the lock expires. Here are the basics you need to know about mortgage rate lock to avoid common mistakes when refinancing your loan.
A common misconception for many homeowners is that if you lock your rate and mortgage rates go down, your rate will also drop to the new level. Unless it’s in your contract this simply isn’t true. Many people think you should lock your mortgage rate as soon as possible and then if rates go down you can “relock” to the lower mortgage rate. Once you lock your mortgage rate in writing, your rate is locked…period.
Always Lock Your Mortgage Rate in Writing
When you decide to lock your mortgage rate you must tell your broker to execute the mortgage rate lock and get the confirmation agreement in writing. If you don’t have it in writing you never locked you mortgage rate. Next, make sure the proof you get from your mortgage broker is actual proof from the lender. The mortgage broker will receive a faxed confirmation, although it could be emailed or a online form from the wholesale lender that details the terms of your rate lock. This document will include the type of mortgage, interest rate, points, and most importantly when the lock expires.
Make Sure Your Written Rate Lock Confirmation Comes from the Lender and NOT The Mortgage Broker…
Dishonest mortgage brokers will try and trick you by passing off a bogus Mortgage Rate Lock typed up on their own letterhead. If you get something like this you have probably not locked your rate or they are simply hiding their markup of your mortgage interest rate. Either way, do not accept any rate lock confirmation that does not come directly from the lender.
How Long Should I Lock My Mortgage Rate?
If your mortgage rate lock expires before you have a chance to close on your loan the lender does not have to honor the rate you were promised and will probably raise it. Once your rate lock expires it is not in the lender’s interest to give you the lowest rate since they have already hedged funds for your loan.
Suppose for instance you lock your mortgage rate for 30 days at 5.5%. You miss your closing date and the rates while you were locked when up to 6.25%. This means you’ll be stuck with a rate of 6.25% because the lender will always give you the higher rate. Even if rates go down you’ll be stuck with your old rate because it is the higher of the two.
Should You Float Your Mortgage Rate?
Floating your mortgage rate means you choose not to lock. There is no obligation on your part or the lenders to commit to a specific mortgage rate. If rates are going down you’ll be in a good position to catch the lower rate; however, if mortgage rates are on the rise you have no protection from the market. Floating your mortgage rate is a risk you take…you might come out ahead but you might lose big.
Watch Out For Yield Spread Premium
The lender’s rate lock confirmation is the first opportunity you’ll have to catch Yield Spread Premium (YSP) on your loan. If you’re not already familiar with YSP this is the mortgage broker’s markup of your interest rate for a commission. If you want the lowest possible mortgage rate when refinancing you’ll need to ensure your loan does not include this markup.
You can learn more about avoiding Yield Spread Premium when locking your mortgage rate by checking out my free Underground Mortgage Videos on this website.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
