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FAQ: Locking the Rate
What does “locking” mean?
Just like the stock market, interest rates are constantly changing. Consumers often have the impression that mortgage rates change from month to month, similar to auto loan interest rates or the “prime” rate which may only change only once in a year and often less frequently than that. Mortgage rates change daily and sometime when there is volatility in the bond market they can change several times during a day. Thus the “quote” you receive this morning (i.e. the “price” of a particular rate) might change slightly later in the day. By “locking”, the costs you pay at a particular rate can be fixed for a period of time. Once locked the costs at the rate you’ve chosen will not change during the duration of the lock period.
When can I lock in the rate and costs?
Once you’ve made application with AmeriFund and provided income and asset documentation you are eligible to lock in the rate and costs associated with that rate. Thus, if you make application online or by phone in the morning and immediately upload or fax us your income and asset documentation (e.g. bank statements, pay check stubs, W-2s and for some applicants, tax returns), you can lock that same afternoon. For most loan programs, you can even lock on the weekend (which is somewhat rare in the mortgage industry).
How do I lock in the rate and costs?
Once you’ve completed the initial application procedure you are eligible to lock in the rate and costs. Your AmeriFund loan consultant will provide a lock agreement and a detailed itemization of costs for the interest rate you have chosen. Once you execute the agreement we will immediately attempt to lock in that pricing with one of our wholesale or secondary market sources. Only in rare circumstances of high market volatility would the quoted pricing change between the time you signed the lock directive and the time we receive it and attempt to execute that lock. If we are able to deliver that lock on the indicated terms we will notify you immediately and later provide a fully executed copy of the lock agreement and an amended Good Faith Estimate reflecting the new “locked” terms.
For how long can I “lock” in a rate and costs?
AmeriFund offers lock periods of up to 360 days, enabling applicants with closing dates many months away to lock in the rate and costs during periods of increasing interest rates. The “price” (i.e. the costs charged at a particular rate) at a particular rate increases as the lock duration increases. Thus you will receive the best possible pricing when you lock for a period of 15 days (our shortest lock duration), which you would only do once your anticipated closing date was within 15 days on a purchase, 9 days on a refinance requiring a right of rescission period after closing. The cost of locking up to 60 days is only nominally higher (only a few hundred dollars) than the cost of locking for 15 days. Extended locks of up to 120 days can require payment of up to 3 discount points (3% of the loan amount), but that is often much less than the costs would increase over that period if the loan were not locked when market rates are increasing during that period.
What happens if I cannot close and fund within the lock period.
If for reasons beyond our control you are unable to close within the duration of the lock period you will usually (but not always) have the option of “extended” the lock duration period by a few days by paying an additional charge. You would want to utilize this “extension” option if rates had increased since the date you locked. The cost of extending at the end of the lock duration period is more than had you merely locked for the longer period initially. If at the time the lock duration period expires, rates have improved, you could then “re-lock” on the same terms contained in your original lock agreement without paying any additional charges.
If rates / costs improve after I lock, do I get the better rate and price?
Unless you elect to utilize AmeriFund’s “float-down” option (which is only available on certain loan programs and must be chosen at the time of application or shortly thereafter) you will not receive a better rate or lower costs after “locking” in the event rates subsequently drop prior to closing. A “float-down” option that does provide you with a lower rate in the event of market improvement after you lock is available on some programs. Ask your AmeriFund loan consultant for the terms and conditions of our “float-down” option.
Do I have to pay a fee when I lock?
You will sign a lock agreement that legally obligates you to proceed with the transaction but will not be required to pay a “fee” or a “deposit” for locks with a lock duration period of 30 to 60 days. You might be required to pay a deposit (applied toward costs at closing or refunded at closing) on extended locks exceeding 60 days or in the event of a mandatory lock of 15 days or less. Consult your AmeriFund loan consultant for more information.
If I do not close during the lock period or an extension of the lock period will I be required to pay a penalty?
Our lock agreement obligates an applicant to proceed to closing within the lock period or the extension thereof and any deposits paid at the time of locking will be forfeited in the event of an applicant’s default (i.e. failure to proceed to closing within the lock period) and an applicant would be liable to pay a penalty of up to 1% of the loan amount or $2,500 (whichever is greater) in the event of the applicant’s failure to perform under the agreement. However, if your loan application is denied after fully complying with all documentation requests in a timely manner, or if your contract to purchase a property is terminated in a purchase transaction, you would have no obligation to pay the penalty for locks of 30 to 60 days. Deposits paid on extended locks exceeding 60 days would not be refunded, however, regardless of the reason for the default. For this reason, you should not lock for extended period exceeding 60 days until you have obtained loan approval and are certain that you can complete your purchase transaction within the lock period.