Mortgage shoppers can once again lock in rates and avoid rising mortgage rates
Several lenders around the country are reviving special “lock and shop” programs that allow pre-approved borrowers to avoid the threat of rising mortgage rates by locking in a preferred rate while they search for a property.
“Lock and shop” lending opportunities all but disappeared after the housing bubble burst a few years ago, but they’re coming back into vogue today as banks and other financers strive to remain competitive.
“The main advantage is the security of knowing your interest rate and not being subject to market fluctuations while you’re looking for a home,” says Mark Feder, president of Pacific Home Mortgage Funding, Inc. in Solana Beach, Calif.
Additionally, if rates drop, the borrower may have the option of locking in a new, lower rate.
The disadvantages are that not very many lenders currently offer “lock and shop” programs, and the borrower will pay a premium rate (usually one-eighth to half a percentage point higher than the lowest rate available) plus a non-refundable fee to the lender for the privilege of locking in.
“Also, the escrow must close within the lock period, which can be 30 to 90 days,” says Phil Georgiades, chief loan steward, VA Home Loan Centers in San Diego. “If the home is new, owned by the lender, a short sale or in need of repair, the closing can be delayed by weeks or months, and the borrower usually will have to pay a penalty for not closing on time.”
The penalty could range from approximately $200 and $1,400 a week, he says.
The best candidates for “lock and shop” programs are borrowers who are concerned that interest rates will rise dramatically in the two to nine months before they close and those who will purchase in an area with little to no competing buyers.
“An alternative is letting the market play out and being willing to pay discount points to reduce the interest rate and payments if they shoot up,” Feder says. “Discount points can end up being less expensive, and they’re only paid if rates rise significantly.”
© CTW Features