When preparing for a closing on your refinance or home purchase, one of the documents you will be provided with a few days before closing is a HUD-1 Form. This form provides you with valuable information about your loan.
You already own a home, but you heard that mortgage rates are great right now and you want to refinance to take advantage of the timing. Now you need to lock a rate so you don’t miss out if the trend turns around and goes bad.
Since you’re refinancing your home, you may have already locked in a mortgage rate before. If you already know the basics of locking a loan but need a few extra specifics about refinance locks, go directly to section 2!
For the general purpose user, we assume you want to start from the very beginning, and it can never hurt to see the information over again.
1. To lock in any rate, you have to apply for a loan and get pre-qualified.
If you haven’t applied for a loan yet, the first thing you need to do is submit an application. Apply, get pre-qualified, and then lock in your rate. It’s that simple. Good lenders can get you locked in the same day you submit an application, provided it is not submitted at the end of the day.
You’ll still have to provide the same proof of income and assets; however, that can be done after your rate is locked. A credit report will have to be pulled prior to locking a rate as your credit score is the biggest factor in determining what rate you will qualify for. On the bright side, you’ll know what to expect, having financed a home before.
In fact, the application process is easier on a refinance given you don’t have to deal with sellers, Realtors or bidding wars like you did when you purchased your home. You’ll already have a proven record of paying your mortgage, and you’ll probably know what kind of payment you’re looking for in the future as well.
2. Not all refinance loan options are the same, so choose carefully before locking.
When considering a refinance make sure you consider the total closing costs associated with the loan including all lender and third-party fees. It’s not enough to simply scan the internet or call a lender for their lowest rate. It is just as important to know the associated costs with a particular rate. The lower the rate the higher the costs and vice versa. Make sure you are considering all options including low or no cost options when refinancing.
Once you’ve decided on the right program, rate and cost structure get your rate locked if there is a sizeable benefit over your current situation. Make sure you’re going to happy with the program for which you locked in your rate. If general rates jump higher and you’re locked into a rate for a program you’ve changed your mind about, you’ll be in a difficult position.
Once you know what type of rate you want, lock it in. Mortgage rates tend to go down slowly and increase If you are getting a nice benefit from current rates, don’t risk rates unexpectedly jumping higher. If the do drop significantly, most mortgage companies will find a way to renegotiate to a rate between what you have locked, and the going rate at that time. You do not need to lock a rate in order to start the refinance process; however, in most situations it is risky to go through the process while floating the rate. If rates unexpectedly pop while you are going through the process you could still be out the cost of the appraisal and any other upfront fees the mortgage company charged even if it no longer benefits you to go through with the loan.
You do not need to lock a rate in order to start the refinance process; however, in most situations it is risky to go through the process while floating the rate. If rates unexpectedly pop while you are going through the process you could still be out the cost of the appraisal and any other upfront fees the mortgage company charged even if it no longer benefits you to go through with the loan.
3. There are a few extra things you should know about refinance rate locks.
- The length of the rate lock (typically 15, 30, or 45 days) can affect your interest rate on the very small scale, typically a fraction of a percent. This is because the lender who locks in your rate is accepting all of the risk that rates will increase while you still get to take advantage of the lower rate you locked in. The longer the lock, the more risk for the lender. With that said the security of a rate lock is well worth it as daily rate fluctuation far exceeds the higher costs of longer lock periods.
- Find out upfront what the lenders policy is for renegotiating a rate. Preferably you will work with a lender that monitors rates for you and will try to renegotiate the rate if the opportunity arises.
- Work with your loan officer. Locking into the right loan program for your financial situation and choosing the best combination of rates and costs is just as important if not more important than timing the market perfectly which takes luck.
If you’re ready to learn more about refinancing your mortgage, download and read our comprehensive refinance ebook.