The Cost of a Rate Lock
How A Rate Lock Works
“But, Kevin,” I hear you say—and I can picture the hopeful expression on your face, “if I have to give up the cost of the lock, will I at least get the lower rate?”
Sorry, in most cases, the answer is no.
Why Rate Locks are Unpopular
Okay, now that I've said all that, I want to encourage each one of you to please lock your interest rate at the time you apply for your next loan!
“What!” you scream. “But, you just told me that locking didn't make ﬁnancial sense!”
No, not exactly. I explained how a lock fee is calculated, and why most people don’t lock; but the truth is, in nearly every case, a lock is one of the absolute best things you can do for yourself. One of the most important reasons for this is that lenders only advertise—and loan ofﬁcers only quote--short-term rates.
What is a short-term rate? I’m glad you asked!
Short Term Rates and Interest Rate Quotes
Why is a low quote so important? In my experience, there are three things that people are comparing when they shop for a mortgage loan: rate, fees, and service. Of those three which do you think carries the most weight with the average borrower when he is making his ﬁnal choice? I’m sure I don’t have to tell you that it is the rate. And you are right to be concerned. After all, you’ll only be paying the closing costs one time; you’ll only experience your loan ofﬁcer’s wonderful service for about a month or so, but you’ll be paying that interest rate for the next ﬁfteen to thirty years. You’ll be reminded of it every time you sit down to write out a check to your lender and, over time, even a small difference in rate can add up to a large amount in actual dollars paid.
Now, I know of no loan ofﬁcer who is ignorant of the fact that most consumers are extremely rate conscious. They are also quite familiar with what happens if a potential client doesn't get a quote that is lower than the best one he’s heard that day: the depressing sound of a dial tone. He knows that if the potential customer doesn't hear what he wants to hear, the loan ofﬁcer will never get a chance to sit down with him and give him his best sales pitch. Therefore, he must give the lowest quote he can honestly give (or that which he honestly thinks he can get you to believe). Nevertheless, the truth is that a quote is just a conglomeration of air molecules massaging your eardrums and numbing your ﬁnancial sensibilities; it means nothing unless the loan ofﬁcer can actually deliver what he promised within the time required to close your loan. In my opinion, it is dishonest (and dishonorable) for a loan ofﬁcer to quote a rate without including the time frame for which it is good, because most borrowers will assume that they can actually get that rate. Therefore, if you rely upon quoted rates as the most heavily weighted factor in your decision of what lender to use, you are virtually guaranteed not to get what you were promised.
My goodness! Is there nothing to be done? Read on, my friend. All will be made clear soon…
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