Different lenders use different methods for determining what interest rate and points you ultimately pay on your mortgage. For example, the rate you are quoted when you do your mortgage shopping, may have gone up by the time you get your commitment letter. Which rate will the lender give you? Most likely, it will be the higher rate.
It is important to determine when you apply for a loan when your rate and terms will lock in. If they are set at the time of application, fine. If they are set at the time of commitment, it may be useful to lock in your rate, if you think interest rates are rising.
You will be charged a fee for this privilege, so it is important to use it wisely. If you think interest rates are falling, you may not want to lock into a rate that could be higher than the rate in effect when you close the loan. Here's your action list:
- Ask the lender about when your rate "locks." If it is when you submit your application, locking in should not be a concern of yours unless rates are falling. If they are, ask if you will close at the lower rate even if you applied at a higher rate. If you will get the higher rate, a lender that locks you in at commitment may be a better choice for you.
- If the rate locks at commitment, again determine what the interest rate trend is. If rates are on the rise, paying for a lock-in at application may make sense. If rates are falling, paying for a lock-in at application will work against you.
- If you do pay for a lock-in, make sure your lock-in is in writing and spells out the exact terms of your agreement with the lender.
- Make sure both rate and points are locked in.
- Your commitment letter will guarantee you a loan at locked-in terms. This promise, however, expires (the document will specify the expiration date). If your letter indicates many pending items unresolved and your attorney feels you may not make the deadline, you may want to extend your terms at that point.
- Always check on the refundability of lock-in and extension fees. Many lenders have provisions for full or partial refunds if you end up not closing the loan; others do not. See where you stand before you hand over any cash.
IMPORTANT NOTE: Your lender will want you to sign the commitment letter and return it, usually within ten days. Before you do so, make sure you consult with your attorney.
Once your attorney advises you to sign and return your letter, you have some important steps to take, like deciding on how your title deed will appear and insuring the property.