Interest rates are the same way. They fluctuate on a daily basis for a variety of reasons. They can go down, but they can also go up. Even the change of a few basis points (hundredths of a percentage point) can make quite a difference when you’re talking about a loan transaction in the hundreds of thousands of dollars. It’s important that when you get that deal you’re comfortable with, you grab on and don’t let go.
Rate locks are the tool that allows you to lead the bull to the corral and pen it in. Here’s how they work.
The Deal with Rate Locks
Rate locks are just what they sound like: You’re locking in your interest rate. The rate lock agreement lasts for a certain amount of time (typically 40 days). You have until the end of the rate lock period to close on your home.
A rate lock provides protection from rate spikes. It allows you to have the time to get everything finalized with your appraisal, inspection and documentation.
There are some situations in which borrowers have a problem closing the loan by the end of the rate lock.
The first thing to be aware of is that appraisers often get busy. Most home loans require an appraisal, regardless of whether it’s a purchase or refinance. In the current low rate environment, people are in a better situation to do both of those things, therefore increasing the number of appraisal appointments.
The other pitfall is the fact that certain processes take longer in different states, as some states have different regulations.
The good news is you can often get an extension to your lock by talking to your lender. Some lenders charge a fee for this, but some don’t. Ask your lender what their policy is when you apply, so you have the right expectations upfront.
You can also save yourself some of the headache by getting documents in promptly. The sooner your lender receives the necessary information from you, the sooner they can put your loan file together and wrap it up in a tidy little package to be underwritten efficiently.
Remember, your lender will more than likely require three things from you:
- Two pay stubs
- Two recent bank statements
- Two years of W-2s
These are just the basics and more information is likely necessary, but your lender can walk you through additional requirements specific to your loan. The important thing is to get everything done in a timely manner so your rate lock doesn’t expire.
Why Lock In?
As we discussed above, locking in protects you from market volatility. The Federal Reserve has indicated its intention to raise short-term interest rates at some point before the end of the year. When it does, mortgage interest rates are likely to go up.
As it stands now, we’re in a very consumer-friendly environment to borrow money. Rates are near historic lows, which makes it that much more imperative to lock in that super low rate. At Quicken Loans, we know you’re busy, so our revolutionary Rocket Mortgage means you can obtain a home loan completely online while you handle all the other aspects of your life!
That’s the lowdown on rate locks and why they’re important. If you have any questions, leave us a note in the comments.
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