If you're planning to apply for a refinance or purchase home loan, it's always a good idea to shop around with at least three different lenders to make sure you're getting the best deal. Even more important than just shopping around is that you shop right, meaning you know the right questions to ask to make sure you’re comparing loan offers that are truly apples to apples. It’s only when you’re evaluating truly comparable offers that you can easily determine which one is the best deal.
One of the most important questions you must ask when shopping rate quotes is what is the rate lock term?
Lender Assumptions Impact Loan Pricing
When you’re just shopping around, you’re very early in the loan qualification process, so lenders have to make assumptions about factors that are important to loan pricing, such as the property value and the amount of any loan payoffs (assuming you’re refinancing). Where shopping gets tough is when lenders make different assumptions about these factors, which can make one loan offer look much better than it really is. For example, if one lender assumes a much higher appraised value, which makes the loan look a lot less risky (at least on paper), their rate quote will be much more attractive than one from a lender who assumes a lower appraised value.
It’s important that you always ask about the rate lock term because it can have a big impact on loan pricing. Rate locks cost the lender money, and the longer the lock, the more it costs. Naturally, these costs are passed on to the borrower through the rate and fees on the loan.
Because the rate lock has such an impact on pricing, many lenders manipulate it to advertise some pretty insane interest rates. I know of at least one lender that used to constantly advertise amazing rate quotes on the radio, but when you picked up the phone and called, you discovered the rate quote assumed no rate lock. Considering loans take around 45 to 60 days to complete, who would want to be exposed to the market for that long? By the time you get to the closing table, that great rate quote would be long gone.
For insight into other gimmicks mortgage lenders use to advertise rate quotes, be sure to check out my blog about it.
Always Ask About the Rate Lock Term
When you’re shopping rate quotes, make sure you always ask how long the rate lock is. Even more important, make sure all rate quotes assume the same rate lock term so you’re comparing offers that are truly apples to apples.
Mortgages are a lot more complicated today, so I highly recommend going with at least a 45-day rate lock. You probably don’t want to go any shorter than that or you risk getting hit with rate lock extension fees, which can get quite expensive.