When you’re preparing to purchase a home, the last thing you want is to incur unexpected fees. That’s exactly the situation I found myself in recently when purchasing a new construction rental property. The property didn’t close on time because the builder wasn’t ready, and I had to pay a lock fee to keep the interest rate I secured. Because we had a very rainy spring in Dallas, the builder’s timeline was pushed back three weeks. For homes that aren’t new construction, sometimes the underwriting takes longer than expected. It’s imperative that you provide all documents upfront so that you aren’t the reason for the closing delay. Since the market can fluctuate daily, it’s important to lock in a good interest rate and to be INFORMED regarding what could happen if your loan doesn’t close on time to mitigate the daily lock fee expenses. Mine was $85 and change per day. Before you find yourself in a similar situation, remember the following important information.
What is a rate lock?
If you’ve gone through the process of purchasing a home, then I’m sure you remember having the conversation with your mortgage advisor about locking in your interest rate. By locking in your rate, the lender agrees to honor that specific interest rate for a set period of time. Like with any situation, there are pros and cons to locking in an interest rate. When the market starts to fluctuate up, you still have the lowest rate, but let’s say the market starts trending downward. Then, you could lose out on a lower rate. As a consumer, it is up to you whether you want to lock down a rate.
When do you lock in a rate?
Locking in an interest rate will vary by lender. Some lenders will lock in the rate after you’re pre-approved while others may wait until after you’ve gone under contract. If you lock in your rate too early, your rate lock might expire, and you might face extension fees. It’s important to remember that pre-approval doesn’t guarantee full approval of a loan. Also, your rate lock can be voided if the lender finds items on your credit report or mortgage application between the time of the initial credit check and the time you go into underwriting. According to Bankrate.com, most lenders lock in the rate for 30 days while some may go as long as 60 days. When speaking with your mortgage advisor, find out what their interest rate lock options are for 15, 21, 30, 45, and 60 days. If you believe you won’t close in 60 days or less, it’s recommended to wait to lock in the rate.
Do I pay for the rate lock?
Locking in your rate isn’t free, but that doesn’t mean you’ll see a line item charge. Most lenders do not charge a separate fee for locking in your rate within a certain period of time. The cost of a rate lock is rolled into the rate you’re offered. Lenders usually charge a fee when the rate lock expires, and the borrower wants to extend.
What happens if the rate lock expires?
If the time period expires on the rate you’ve locked in, then it’s because your loan didn’t close on time. Since everyone’s situation is different, it’s best to speak with your mortgage advisor about your personal circumstances. You might be able to extend the lock for a couple of extra days if there was a last-minute delay, you may need to pay a fee to extend it, or you may be better off purchasing points to reduce the interest rate.
How do I ensure that the loan closes on time?
It was reported in 2018 that Wells Fargo had 110,000 customers affected by rate lock fee extensions. It was later found that the reason the loans didn’t close on time was that the bank itself had slowed things down. While you can’t always stop the unexpected from happening, there are a couple of things you can do to make sure your loan is moving along, including sending your paperwork in on time and following up with your mortgage advisor regularly.
If you find yourself facing rate lock fees, it’s time to start negotiating again. Depending on the situation, you may be able to get the bank to cover the fees if they’re dragging their feet or get the seller to cover them if they changed the closing date. At times, the appraisal may take longer than expected, or a storm rolls through and no one is at fault. By knowing your lenders' policy ahead of time, you’ll be prepared when the unexpected happens.
For my situation personally, I was able to negotiate with the seller to contribute toward the lock fee extension costs. They paid the last lock fee extension since the closing was delayed due to their timelines, not because my lender or I was not ready, willing, and able to close.