A rate lock is a contractual agreement between the lender and the buyer/borrower. There are four components to a rate lock: loan program, interest rate, points, and length of lock term.
Loan Program is the specific product you have chosen such as a fixed or adjustable (ARM) loan. Whether the loan is a purchase, refinance, or cash out refinance can make a difference. At times, the loan-to-value ratio (LTV) also affects loan rates. A broker, like First Ohio, will be able to look at many different lenders and find the best interest rate for your particular situation.
Interest Rate and Points - your loan officer will choose an interest rate that makes sense for your particular situation. You can buy down your interest rate by paying discount points, or accept a higher interest rate in exchange for getting some of the closing costs paid for by the lender.
Length of Lock is simply the lender’s reservation of the loan funds in the open market. Locks are generally good for 15-60 days on most mortgage loans. Extended locks for up to 12 months are available for construction loans, and generally require about 1% of the loan amount up front. Longer term locks carry a higher interest rate due to risks of market volatility.
January 3rd, 2008 at 1:15 pm
J. - When you say, “your loan officer will choose an interest rate that makes sense for your particular situation,” What do you really mean?
That the loan officer will show which interest rates are available on different programs and have a conversation with the buyer about which one THEY will choose?
January 3rd, 2008 at 3:09 pm
Good question, Joe. I was trying to simplify the concept of premium pricing, rebates, lender credits, discount points, etc. For example, in some cases, we can credit some of our compensation to help a borrower with closing costs. In other cases, a borrower can choose to pay points to lower their interest rate.
Our standard practice is to suggest a few programs that are most likely to get approved and meet the needs of a particular borrower. But you are exactly right — it is the borrower’s choice which loan program to apply for.
Thanks for the feedback!