When bankers, mortgage companies and investment companies speak about locking a rate, they are talking about getting a commitment to an interest rate that will not fluctuate as the Federal Reserve or inflation adjusts interest rates. Both borrowers and investors want to lock in the best interest rate for their investment. Follow these steps to lock a rate.
- Have your documentation ready. Before you request a rate lock make sure that you have all the information needed to complete the loan or investment process. This is most important for borrowers who want to get a commitment about the interest rate on a loan or mortgage. Gathering all your income and credit information takes time so make sure you have it before you need it. Double check with the loan department or bank about what they need so that there are no surprises. Get the documentation requirements in writing if possible.
- Watch the market. Make sure that you really want to lock in the rate before making a request. If interest rates are trending down, there may be no benefit to you to lock in a rate. However if interest rates are rising steadily then you want to lock in your rate as soon as possible. Certain investments like bonds and certificates of deposit (CDs) have an interest rate that is set at the time of the purchase of the bond. Investing in such items can be more advantageous when you watch the market and take advantage of the best rate. Remember that you can never be sure of a rise or fall in interest rates but watching the market can help you make the most educated guess.
- Request the rate lock. Speak with your loan officer or banker to request a lock on the interest rate. If they agree you will need to get the commitment in writing. A verbal agreement is very difficult to enforce. When you get the lock in writing the letter of commitment should state how long the lock is valid. Oftentimes a rate lock can be guaranteed for as few as seven days.
- Pay any required fees. Often a rate lock or commitment will require an additional payment or fee paid by you to ensure the guarantee. Evaluate the cost of this fee to make certain that the lock is worth the cost and then pay any required fees.
- Discuss all eventualities. When activating a rate lock commitment you need to know all the contingencies of the agreement. Some will institute a rate cap which provides that the rate lock is within a range instead of a specific rate. Others include a statement that if interest rates rise beyond a certain level, the locked rate can be adjusted.
- Finalize the loan agreement. Once you have a rate lock you cannot slow down the loan process. Get everything in order and start the process so that the loan can be settled before the rate lock expires.
Keep in mind that your rate is not locked until the papers are signed. Before that time you will be given a rate quote or rate estimate of what it will be at the time the commitment or agreement is reached. By following these tips you can get a rate lock that suits your needs.