The Ins and Outs of Interest Rate Locks

May 17
Category | Blog

Once you apply for a mortgage, whether for a purchase or a refinance, you’ll soon get your fair share of paperwork. There are things to sign, initial and understand and some of those documents might seem a bit redundant, if not confusing. Yet by law, these loan disclosures are required to be presented to those who apply for a home loan to provide a thorough understanding of the terms of the loan, monthly payments and other important information. One document included in the stack is a form generally referred to as an Interest Rate Lock/Float Agreement. Why is this included?

Because your interest rate isn’t guaranteed until you specifically request the lender lock your rate for you. Here’s why that’s important. You recall when you first started out researching mortgage options, one of the most important things you wanted to know concerned interest rates. What’s the rate today? Are there any points? What’s my monthly payment? All questions revolve around the interest rate. Yet regardless of any rate you see advertised or quoted to you directly, they’re really not available to you. You need to lock that rate in.

Lenders can have different rate lock policies but whatever the policy it must be disclosed. That disclosure comes in the form of the Rate Lock/Float Agreement. One of the primary requirements to lock in a rate is having a loan application on file with the lender. Many years ...

Mortgage insurance has been a staple in the mortgage industry since the late 1950s. Private mortgage insurance, or PMI, is in fact an insurance policy much like any other. Mortgage insurance on conventional loans is required when the first mortgage exceeds 80 percent of the value of the home.  If the borrowers put down 20 percent or more, no mortgage insurance is needed. Should the loan ever go into foreclosure, the lender is compensated by the difference between the borrower’s original down payment and 20 percent of the value of the home. This amount will vary based upon other factors but generally speaking that’s how mortgage insurance works.

Yet up until the passage of the Homeowners Protection Act of 1998, mortgage insurance was a lifetime affair. Unless the mortgage was retired by sale or refinanced, the mortgage insurance policy would always be a part of the mortgage, regardless of the current market value of the home. This Act provided ways for consumers to get rid of mortgage insurance, either by a direct request or natural amortization, for all loans issued on or after July 29, 1999.

Borrower’s Request

Borrowers may request cancellation of a mortgage insurance policy by writing the current lender asking for a review and removal of PMI once the mortgage balance is naturally paid down to 80 percent of the original value of the property. The ...

Have you ever been curious how lenders set their interest rates? Wonder why lenders ask a series of questions when you call and ask them about their rates before they make any sort of quote? Mortgage lenders price their mortgage each business day on the very same set of indices. Without going into detail, that’s for another blog, lenders set a 30 year fixed rate based upon the price of the FNMA-30yr 3.0 coupon. That’s a mortgage bond and can fluctuate day to day and even through the course of the day. That said, it’s just a starting point.

A lender may have a general interest rate they quote to potential borrowers but that rate is subject to other factors as well. This is why lenders won’t lock in your interest rate until they’ve received a completed loan application and reviewed a credit report. You can have three different borrowers call the very same lender on the very same day and they may each have a different quote. Not a big difference, but a difference nonetheless.

For example, borrower A might have a quote for a 30 year mortgage of say, 3.75 percent with one point. Borrower B might have a quote of 3.75 with one-half point while borrower C could be quoted 3.875 percent with no points. All for the same 30 day lock period. But there is a method to this apparent madness.

Understanding The LLPA (Loan Level Pricing Adjustment)

Lenders price their loans based upon the Loan Level Pricing Adjustment, or LLPA. This is in ...

Don’t look now but spring is just around the corner. And we all know what spring brings. That’s right—new listings and home buyers! Well, spring sure brings a lot of wonderful things, not to mention warm weather, but it’s also considered the start of home buying season. Why? Well, there are a variety of reasons but one of the main ones is buying and moving during the summer before school starts. Buyers may also sit on the sidelines during the cold winter months and hold off trudging out into the snow and wait for more pleasant weather. Are you one of those? Are you going to buy a home during buying season? If so, here are a few tips that will make your loan process a smooth one.

Check Your Credit

How’s your credit? Most people have a general idea as to the nature of their credit but if you haven’t checked your credit report lately, you should. Not necessarily because you want to confirm the status of your credit profile, although that’s a good thing, but to see if there are any mistakes on your report. It’s no secret that credit reports are rife with mistakes ranging from a wrong address to having someone else’s bad credit show up on yours.

You can get a free copy of your credit report at a number of free online services, including, a service provided by the three main ...

Have you ever wondered why mortgage interest rates often change rapidly? Has there been a time when you visited a lender’s website to view an interest rate then later called that company and the actual rate is lower? Or higher? Why do lenders change their rates all the time, why can’t they just issue an interest rate for a while and sit on it for about a week or two? Good questions, all. Here’s why:

First, lenders can change rates because they want to stay competitive. That makes sense, but what you may not know is that lenders set their interest rates on the very same set of indices. These indices are monitored throughout the day by mortgage companies and adjust if the index moves too far one way or the other.

Let’s take a look at a common 30 year fixed rate for a conforming loan amount. The related index is a mortgage-backed security. It’s a bond. The corresponding index for a 30 year loan is listed as FNMA30-yr 3.0. There’s no need to go too much further regarding the name of the index but understanding how bonds work, you can understand how rates move.

Bonds provide investors a fixed rate of return. Unlike a stock, an investor knows what the bond will return and when. Bonds provide much lower returns than stocks or mutual funds but they’re also a safe bet. In volatile times when stocks are taking a beating investors pull ...

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