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What Does it Mean to Lock a Rate?

rateLockGraphicWhen working on a home loan, one of the decisions we will make together is when to “lock” your loan.

What does a “rate lock” mean?

When we lock your loan, we are setting aside the necessary funds and “locking” in the loan terms and interest rate.  In essence, think of a lock as your “RSVP;” Envoy is setting aside the necessary funds for your transaction and we are assuming the risk of rates rising during the lock period.

What is important to know about locking your rate?

The moment we lock your loan together is the moment the clock officially begins ticking regarding the loan (for purchases, your offer to purchase will have already started the clock).  Most rate locks come with 15, 30, 45 or 60 day terms (We have extended rate lock options up to 270 days as of the time this post was written).  The shorter the period we lock your rate, the more beneficial to you in terms of overall cost but the faster you must close.

Why and how does the length of a rate lock affect my refinance cost?

In mortgage lending, most every cost factor comes down to one variable – risk.  You will generally find that the more risk a borrower is willing to assume, the better rates and terms a lender is willing to offer.  Conversely, when a lender assumes more risk they tend to counter that risk with higher costs.  In this particular case, the longer we guarantee an interest rate the larger a buffer we will require to offset that risk.

What is the smartest path for you – my client?

The ideal scenario for us is to have as many of our ducks in a row as possible – right now.  You see, if we have your loan file “pre-processed” this will help the underwriter expedite your file through the process.  The faster and smoother the process, the shorter “loan lock” period we can get away with – and the more money you will save overall.  In this same spirit, when and if the underwriter requires additional documentation at some point during the process – please jump on these requests immediately.  Keep in mind, however, that sometimes, no matter how fast we are, if you are purchasing a home, the seller may still make you wait until the last day on the offer to purchase to actually close the transaction. 

What happens if I commit to locking my loan and we do not close in that time period?

Sometimes, conditions arise that delay the process and loan locks “expire” before we can close the transaction.  In this case, the lender will typically grant an extension on the lock period – but at an additional cost.  An expiring loan lock does not typically jeopardize the overall likelihood of the loan closing but it’s a date that needs to be respected as much as possible.

Thanks for reading this post. I always say that “an educated consumer is an empowered borrower” and I am going to keep the information coming your way.  If I can be of any service any time, please do not hesitate to call or email me anytime.

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