In some cases, it may not be wise to lock in rate

STARTING OUT

November 14, 1993|By Dian Hymer

What is an interest rate lock-in?

A lock-in -- also called a rate lock -- is a commitment from a lender to loan you money at a certain interest rate for a certain period of time. If you can't complete your home purchase or refinance within the rate-lock period, and interest rates rise, you'll pay a higher interest rate on your loan.

Some loans can be locked in as early as the time of application; others can only be locked in when the loan is formally approved by the lender.

An interest rate can usually be locked in for no longer than 30 to 60 days, although some lenders will lock in for up to 75 days. How much you'll have to pay for a rate lock depends on the lender, the kind of loan (fixed or adjustable rate, purchase or refinance), size of the loan (it usually costs more to lock in a rate on a jumbo loan over $203,150), length of the lock-in and current credit market conditions.

Some lenders will automatically lock in your interest rate for no addi tional cost and for up to 60 days at the time you make application. These lenders are usually portfolio lenders who make loans to hold in their own portfolios rather than to sell to other investors. The free automatic rate locks are often only available on adjustable-rate mortgages.

Most lenders charge an extra one-half point or so (1 point is equal to 1 percent of the loan amount) to lock in a fixed-rate mortgage. The shorter the lock-in period, the lower the cost to lock in. This fee is usually paid at closing, but some lenders require an upfront nonrefundable fee.

lTC The alternative to locking in an interest rate is to let it float during the loan processing period. If you're floating and interest rates rise before the lender finalizes your loan documents, you'll pay a higher interest rate on your new loan than you would have if you had locked the rate. If interest rates drop during the loan processing period, you'll get a lower interest rate on your loan.

FIRST-TIME TIP: Ask your loan agent or mortgage broker if interest rates appear to be rising or falling before making the decision to lock in a rate or not (although no one can guarantee which way rates will go). If rates appear to be stable, it's better not to lock in because it often costs extra and you usually won't get the benefit of a lower rate if rates drop.

Be sure to get a lock-in commitment in writing. Some lenders have refused to honor verbal lock-in guarantees during periods of rising interest rates.

THE CLOSING: If you do decide to lock in, get a completed loan application to your lender as soon as possible so that your commitment doesn't run out before your loan is approved. Make sure any additional documentation required by the lender is sent without delay. Have the loan agent order the property appraisal right away, which will probably require you to pay an upfront fee of approximately $300. Make sure that payoff demands from existing lenders are ordered in time. Existing loans must be paid off before a new first loan can be secured against the property.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif. 94618.

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