Before your loan documents can be drawn up for you to sign, your loan must have a rate lock. Your rate lock is your final interest rate on your loan. When looking at a rate lock, you need to be aware of three things as they pertain to your loan program.
1. Interest Rate - The interest rate is not just a number picked at random. Depending on market conditions, your interest rate can cost you nothing in points, some points or fraction thereof, or you may receive credit from the lender for a no fee loan.
2. Points - This is a cost associated with an interest rate on any given day and on any given interest rate, again depending on market conditions. If you are quoted an interest rate at no points, this is the par rate for the day. You may asked what the interest
rate is if you pay a point, which is 1% of your loan amount. Most likely, it will reduce it around ¼%. For a no fee loan, you may get a ¼% higher rate and receive 1 point of the loan amount as a credit towards your closing costs.
3. Length of the Lock - Lenders have as a general rule 15, 30, 45, 60, and 90 days. The longer the lock period, the higher the interest rate and point(s). When you look at a 15 day lock, the lender has less risk because your loan is close to closing and the cost of
the money is factored in. When you want a longer lock for 60 or 90 days, the lender has calculated the cost of holding that money for a longer term and the element of risk. Lenders can lose money if you do not close your loan by the time the rate lock expires. This is due to their cost of the money and the loan does not close. Compare it to buying an item for $1.00 because someone said they would buy the item from you for $1.05.
If they do not buy it and the price of the item in the market place goes down to $.95, you lose $.05. |