Floating and Locking in the world of Interest Rates

I asked my friend Ricardo Bueno, a Pasadena Mortgage Broker to explain in detail the difference between locking and floating a loan and what does that mean.  Here’s his post – Enjoy!

Lock or Float? Mortgage Rate Locks Defined!

If you’ve been following the Daily Mortgage Updates here on The Industry Report, I’ve been giving you recommendations to “Lock” or “Float” your Mortgage Interest Rate at application.

 Locking your Mortgage Interest Rate can mean the difference between paying a higher interest rate tomorrow.Floating your Mortgage Interest Rate on the other hand, can save you money if there’s any economic indication that interest rates will fall tomorrow or the by the end of the week. (For a quick read/explanation on the Economics of Interest Rates & How They Work, READ HERE)

Definition of A Mortgage Rate Lock: Picture_5In short, a mortgage rate lock (when we say Locked-In) is a written agreement issued between a borrower and Lender that secures (a.k.a. locks or freezes) the interest rate on the mortgage they’re (the borrower) applying for in accordance with the day’s prevailing market mortgage rate.The rate-lock will be issued over a specified period of time that ranges between 15-, 30-, 45-, and 60-days; although 60-day rate locks are not commonly used. It should be noted that dates are particularly important because they translate into a difference of approximately .125% difference in interest rate. 

For Example: On a 30-Year Fixed Rate Mortgage, you can:

  • Lock-In your rate on a 30-Day Lock for an interest rate of 5.125% (par rate), or
  • Lock-In your rate on a 15-Day Lock for an interest rate of 5% (par rate)

Another relevant feature of Mortgage Rate Locks is that they will be reflected in terms of Discount Points and Origination Points. A discount point is the cost of buying-down the interest rate (to secure a lower rate) while an origination point is the service fee you pay to your broker/lender.Red Flags:
 

  • Receiving a verbal rate-lock: Unscrupulous lenders will verbally tell you they’ve locked-in your rate. I’d opt for a written-rate lock agreement instead!

Today, most lenders require a full application (1003) and signed borrower’s authorization to lock-in your mortgage rate. An additional 1-page rate-lock form is to be filled out but this action is carried out by your broker/lender (this is often performed online).

  • Your rate-lock expires: Unscrupulous lenders have been known to let rate-locks expire under the guise that your loan application could not be processed and underwritten in time. If you’ve submitted all of your paperwork on-time (including any additional “conditions” as requested by underwriting), and your broker/lender can’t fund your mortgage in 30-days, maybe it’s time to find a different lender! (You can contact me here).

They’ll do this when rates rally downward significantly so that they can secure a higher rebate for themselves. (In short, a rebate is a fee that banks pay to the mortgage broker for “selling” you a higher interest rate.)

  • You’re charged a fee to lock-in your mortgage rate: it does not, I repeat, IT DOES NOT cost you money to lock-in your rate. The only cost you will bare is a higher interest rate tomorrow if you don’t lock-in your interest rate today!

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