Locking in Interest Rates
In choosing a topic for these articles, I try to address the questions most frequently asked in my office. Given historically low interest rates, the choice was easy: Should I lock in the mortgage interest rate? The answer is even easier: Don’t lock in (without calling my office first).
In order to understand the answer, let’s first define “locking in”. A lock-in is an agreement between you as the borrower, and the lender, to fix the rate of your mortgage (or co-op loan), at a particular rate, for a particular period of time (30, 60 days, for example), and sometimes for a fee. If you’re not a gambler, and the current day’s rate is attractive and affordable to you, the lock-in is very tempting, and probably a good idea, however, timing is everything. A lock-in will have a definite term, and then it will expire. The closing must occur before the lock-in expires.
Therein lies the problem. There are many reasons why the closing may not take place within the lock-in period, and most of them are beyond your control as purchaser, and beyond my control as your attorney. In fact, coordinating all of the necessary people and documents for a closing, is probably the most difficult and frustrating part of my job. It’s made even more challenging when both parties are buying and selling other properties, and multiple moves need to be scheduled simultaneously. Co-op transactions are also difficult because additional parties (the managing agent and the seller’s lender) are also required to be present at the closing.
Specific examples of problems that delay the scheduling of a closing are as follows:
It may take some time after a purchaser signs a contract and submits it with a downpayment to the seller’s attorney, for the contract to be signed by the seller and returned to us. It’s not a ‘deal’ until a fully signed contract is returned, and time periods usually start to run from the date we receive them. Therefore, do not lock in before the contract is fully signed.
Termite and other inspections, upon which a transaction is contingent, may disclose problems which take some time to be researched by both parties and then negotiated to either a satisfactory conclusion or the termination of the deal altogether. Do not lock in until major issues are agreed upon.
A title report, generally not received until several weeks after the contract is signed, may disclose open mortgages, judgments, violations and so forth, that the seller may need time to resolve. Problems arising in the history of the title can be difficult and time consuming to fix. Locking in before a title report is received risks missing the lock- in deadline for closing, because the seller is unable to close.
Notwithstanding that you may have locked in, your own lender may be the cause of a delay. Many lenders (and their attorneys) are so overburdened, they cannot process loans as quickly as needed to comply with the lock-in date. We’ve even experienced the lender’s own attorney being too booked to schedule our closing within the lock-in time.
We are aware of the lure of the lock-in. We know that mortgage lenders are eager to lock you in and assure that you’ll close your loan with them. I have outlined only a few of the many reasons why you should consult with your attorney before you lock in your interest rate. Ideally, the best time to lock in is after a clear title report is received and there are no impediments to setting a closing. Then the lock-in period can be utilized to set a closing date mutually convenient to all parties.