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Chrisman's Corner: A Primer on Rate Locks during the Holidays

JMAC’s brokers deal with rate locks all the time. But how do they explain them to borrowers, and do holidays matter? Our brokers know, and tell their clients, that a mortgage rate lock is essentially an agreement that says a lender will charge a specific rate and price on the mortgage for a specified period of time while a borrower gets ready to close. But what rate, and what price?

There are numerous factors that determine the final mortgage rate and pricing. Our clients know that credit score is a major factor: generally, the higher the score, the better rate and price available. Brokers are good at explaining that a borrower’s loan-to-value ratio, or LTV for short, is determined by dividing the loan amount into the estimated or appraised value of the property. Charges related to one’s loan-to-value ratio are called loan level pricing adjustments and they’re applied to every mortgage loan.

Homebuyers and refinancers generally choose to lock in their rate either at loan application or at the appraisal. If someone is buying a home, some brokers say that locking in the interest rate at the beginning of the loan process is usually the smartest move as there are many other factors to be concerned about in the home buying process, such as the appraisal, inspections, contractual contingencies, and underwriting. JMAC’s experienced brokers tell clients that they must perform whereas when a borrower is refinancing, it is more of an elective opportunity, not a necessity.

Ultimately, the choice for locking in an interest rate is the borrower’s, who usually relies on the broker. The pros and the cons of locking in the interest rate upfront or waiting until the appraisal comes in as each borrower profile is different, and with the holidays (fewer work days), and key personnel on vacation brokers will weigh the pros and cons. They should be able to help ensure a borrower is never throwing away good money when buying or refinancing.