I recently wrote an article about mortgage rate-locking 101. I thought I’d follow up and tell you about what can go wrong with rate locks because things often do. But don’t worry! Now you’ll be in-the-know.
Rate Lock Pitfalls
After applying for a mortgage, interest rates and points are usually locked in for a specified amount of time. Your locked-in rate is the interest rate you’ll pay for the life of your loan (like the 30-year fixed rate). Over the span of 30 years, a half point or half a percent may mean thousands of dollars. Interest rates may go up or down, so locking in prevents your costs from fluctuating while the loan underwriting is in process.
Unfortunately for some borrowers, rate locks can be blown, that is, your agreement to close your loan by a specified date couldn’t happen for multiple reasons. Understand that some people don’t have rate-lock issues. Even when they do, most rate locks are typically extended without a problem. Some lenders will charge a fee, but some don’t. Either way, it’s nearly impossible to get that original rate back if rates have raised and your rate lock expired. It’s a good idea to address your options for extending the rate with your lender prior to application or at the very least prior to the rate expiration date.
Location, Location, Location
Some borrowers live in states like New York where agencies take longer to process paperwork. Currently, dealing with the Notary of New York takes about a week. State documents like a lien on the house for subordination have about a 50-80 day turnaround, and this may take extra time if you have a CEMA loan as well. Add this all up, and the odds of completing a loan within 30 days seem improbable.
Residents in Texas may also have problems closing loans in a short time. Currently, they have more regulations than other states dealing with home equity loans. These regulations aren’t a bad thing, but it takes more time to determine how much residents can borrow.
The Federal Housing Administration insures loans to people with lower incomes or credit scores to provide homes that they would not normally be able to afford. When buying a house with an FHA-insured loan or refinancing with an FHA-insured loan, an appraiser has to evaluate your house. They will look for things such as chipped paint on the sides of the house, a leaky roof and badly stressed carpet. Because of this mandatory appraisal, some borrowers might find they need to repair the entire deck in order to close on their loan. Coming up with the money in a short amount of time and waiting on repairs often means blowing the locked-rate period. The good news is that borrowers can usually roll the costs into their loan amount (called “escrow holdback”) and have the repairs done immediately if their loan-to-value of the house amount is low enough. If a company doesn’t allow escrow holdbacks, they may allow you to hold proceeds from the loan in an escrow account to pay the contractor once the work is completed.
The Season of Appraisals
Speaking of appraisals, this’ll probably be the biggest reason your rate lock is blown and was the number one stressor in closing loans this summer. Let me explain why this happened.
Appraisers who are contracted by third parties to evaluate a home have normal busy seasons. Typically, this is in the spring to mid-summer when people are selling their homes.
To understand the market, know that refinances are normally low when home purchases are high. Inversely, refinances are high when home purchases are low. That’s typically the way the market has been…
…Except for recently. The economy was finally turning around, especially for people trying to buy homes or refinance. Both refinances and home purchases were high because of very low interest rates. Because of this and added laws governing that most loans need appraisals to determine the value of a house and therefore the value of a loan, appraisals had to be done. Appraisers needed to determine values for both refinancing and home purchases at the same time. They were booked solid and the turnaround time to have an appraisal was at least 20 days, troubling when the rate is only locked in for 30 days, if that. There isn’t anything lenders can do to hurry this process, either, but thankfully, they can extend the rate lock most times.
Return to Sender
The mortgage process can be time-consuming due to documents that have to be returned to the lender, like W-2s from the last two years, veteran eligibility documents or bank statements. Returning these right away helps hurry along the process. Sometimes, however, people get busy with work, caught up with family, and don’t return documents quickly. Just remember that the more quickly you return them, the more quickly they can be processed and the better chances you have to not blow your lock rate.
Waiting for a Better Rate
Occasionally, a client blows the rate through their own doing. They think their rate might be high and if they wait, rates might go down. Lenders generally don’t recommend that people wait because chances are, the rates climb higher and you’re out of luck.
When rates go down before closing, you may want to jump on that lowered rate, but that isn’t always the best idea. First, it’ll probably cost you money because your mortgage lender has paid to secure your current rate and hold that price. Changing it could disrupt the whole process, including the date you close your loan
It’s not a good idea to change your lock rate mid-process unless the costs are truly worth the benefits in the end. If you’re really interested in lowering your rates, talk to your mortgage banker to see if that’s possible.
Preventing a Blown Rate Lock
While a lender may do most of the work, there are some things you can do to prevent a blown rate:
- Work with a company that caters to your lifestyle. You know what you’re comfortable with and now all you need to do is send over some documents to help the underwriters determine what works best for you.
- Don’t wait to send in forms and paperwork because every lender has a different policy on what happens after the rate expires. If you’re working with a lender that locked your rate for 30 days, but all the paperwork has to be sent by US mail, it’ll be hard to keep up with your rate lock waiting for snail mail.
- Know how busy you are and how often you can make trips to a lender’s office for signatures. Some companies like Quicken Loans use technology to process loans faster, either by website, phone apps and SMS text messaging.
What to Do If Your Rate Lock Is Blown
- Don’t freak out; it’s not the end of the world. Your lender should let you know in advance what’ll happen in case this happens or if they anticipate the closing date to be moved.
- Rate lock extensions are common, but may come at a price. Find out in advance what to expect.
If your rates are about to expire, call your mortgage banker to verify what’ll happen. Lenders are great at knowing in advance if they can’t close your loan on time and have policies set in place to either prevent that from happening, or what to do when it does.
If you have any questions, comments, or concerns about rate locks, let us know!