Locking In Peace of Mind

By VICKIE ELMER

Published: April 5, 2012

WITH mortgage rates inching higher, some borrowers might want to consider a lock-in agreement, which freezes the terms of a loan while it is being processed, potentially saving borrowers thousands of dollars over the life of the mortgage.

This guarantee may be especially important for those who are refinancing, where even a quarter of a percentage point could skew a borrower’s calculations and make a refinancing less financially desirable, said Keith T. Gumbinger, a vice president of HSH.com a financial publisher in Pompton Plains, N.J.

Rates for the 30-year fixed-rate mortgage averaged 3.95 percent nationwide in March, up from 3.89 percent in February, according to Freddie Mac, though that is still significantly lower than the 4.84 average rate in March 2011. The average rate was 3.98 percent on Thursday, versus 3.99 percent the week before.

“We expect fixed-rate mortgages to gradually move higher over the next six months to about 4.25 to 4.5 percent as the country’s economic condition improves,” said Frank Nothaft, Freddie Mac’s vice president and chief economist. “This would be a move from the all-time record low rates we’ve experienced over the last few months but still at historically low levels.”

Rate lock-ins can provide buyers with some peace of mind, not to mention one less thing to think about in an otherwise onerous application process.

Lenders typically will give loan rate guarantee agreements when a borrower has a purchase agreement, but a few will provide them to those who are preapproved for a mortgage, said Rick Allen, the chief operating officer of Mortgage Marvel, an online site.

While shopping for a mortgage lender, Mr. Allen suggests inquiring about loan locks, too. “Get a copy of the rate lock agreement,” he said, noting that this would help borrowers better understand how the process works.

The cost of reserving an interest rate depends both on the duration of the lock and the amount of the loan. “The longer the lock, the more costly it is,” said Mark Lazar, an owner of Allied Financial Mortgage in River Edge, N.J. Most locks are for 30, 45 or 60 days, but some lenders will go as long as six months.

Most lenders offer some version of a free lock, Mr. Gumbinger said, though it may be only for 30 days. Others charge points — or fractions thereof — based on the loan size, which could amount to several hundred dollars. (A point is equal to 1 percent of the loan amount.) Sometimes these charges are refundable at closing, Mr. Gumbinger said.

Borrowers may want to skip a rate lock-in, or delay taking one, if they are unsure when their home purchase will close.

“You need to have a pretty good idea of your closing date,” Mr. Lazar said.

Knowing how long to lock in a rate requires a clear picture of the mortgage process, and a good estimate from your lender on how long it will take to approve the loan and complete all the paperwork and other requirements. For some lenders handling refinancing, this can be 15 or 20 days; others take longer.

Mr. Gumbinger said some lenders may extend an interest rate guarantee for a day or two, but if you need an additional 10 to 15 business days to close, it might cost you a few hundred dollars or a one-quarter point fee. On a $300,000 loan balance that would work out to $750.

Mr. Lazar noted that some lenders will extend a rate lock-in agreement for free, especially if interest rates are unchanged.

What happens if your loan doesn’t get approved by the underwriters? Borrowers will need to inquire about whether the lock fee is refundable, and under what circumstances they could receive their money back.

“Most lenders will refund it if the loan is denied,” Mr. Allen said. If the deal falls apart for circumstances beyond your control, such as a failed home inspection, many lenders will refund the fee, he added. If you decide to back out, expect the lender to keep your cash locked up.