Depending on the market conditions, you may want to float your rate. To float means you will wait until you are closer to the loan closing to lock your rate. Since there are costs to lock farther away from the closing date, floating can save you closing costs. If the market is favorable, float your rate.
A lock, also called a rate lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
Shorter loans, such as a 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.
A larger down payment greater than 20% will give you the best possible rate. With a down payment of 5% or less, you should expect to pay a higher rate as you are starting with less equity as collateral. If you've got the cash now and want to lower your payments, you can pay points on your loan to lower your mortgage rate. It's a simple concept, really. In exchange for more money up front, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. Closing costs are fees paid by the lender, if you do not want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.
Your credit quality and debt-to-income ratio affect the terms of your loan through your FICO Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a good credit report, you will not receive the lowest available interest rate.
When a mortgage broker quotes a mortgage rate before receiving all pertinent information from the borrower, the borrower should assume that the rate is not yet locked.
On a refinance loan, be sure to factor in the 3-day recission period. Typically, the loan must come out of recission by the lock expiration date or the rate lock will expire.
Be careful if you're doing a refinance and your rate lock is about to expire. There is a 3-day recission period on refinance loans, and the loan must be out of recission before the rate lock expires, or you'll lose your pricing.
When purchasing a home it is important to make sure that the rate is locked in for a period of time that covers you through your closing date. Often you may shop for a mortgage before you find your home. In most cases until you are under contract for a purchase your rate will be "Floating", which means it is not locked in.
It is a very good idea to ask for a copy of your rate lock commitment from your mortgage lender or mortgage broker after your rate has been locked. This will provide you with proof that your rate really has been locked and that there are no surprises at the end in regards to your rate being what it should be.
A rate lock and range from 15, 30, 45, and 60 days. 30 days is the most common rate lock, and longer lock periods are available. You may be required to pay additional fees for a longer lock period or if you go past your rate lock expiration date.
