By now, the low interest rates in the loan market are old news, but chances are they won’t stay that way forever. We’ve already said goodbye to the historic lows that were being seen not long ago, and interest rates can fluctuate dramatically over short periods of time. Now could be a very good time to look into refinancing or opening a VA loan, because of the generally very low interest rates. But something that often confuses borrowers and can even stop them from qualifying from a loan is the concept of locking in an interest rate during processing.
Borrowers are often frustrated when they agree to apply for a loan at a given interest rate one day, but by the time they are trying to close with the lender, the interest rate is a quarter of a percent more than it was the day they opened the application. In more extreme cases, borrowers get frustrated because the rates have risen so much that they no longer qualify for the loan that they applied for. There is a method to getting around this, called “locking” in an interest rate at the time of application. This is always an opt-in choice, and is subject to individual lenders’ policies regarding locking rates.
Since VA loans are financed by third party VA-approved lenders, and not the VA itself, all VA loans are subject to the lender’s policies and procedures, which cover rate locking as well. Locking is done at the request of the borrower, and prevents the interest rate from fluctuating higher – or lower. Locking will never be done without the permission of the borrower, and may not even be available depending on the rules of the VA lender you are working with.
All lenders require that you have applied for a specific loan for a specific property (no locking an interest rate while price checking over the phone) before allowing a lockout. Generally, lenders will not keep you posted on interest rates from day to day, and it is not their responsibility to do so. Choosing when to lock an interest rate is as important as choosing whether to do so at all. Loan periods can vary in length, but are generally long enough to get the loan completely processed and closed. It’s important to note that rate locks aren’t “free”. A thirty day rate lock could make a 4.00% loan with no points a 4.00% loan with one point.
Once locked, you can’t unlock the rate until the specified lock period has ended. So, if rates go down after you’ve locked, there’s generally not much you can do. However, in some cases, and with some VA lenders, the option of “floating down” exists. A Float Down is generally a one-time option where a borrower can opt to bring their locked rate down to the current market rate if it dropped after they locked. Most lenders that offer this option have specific requirements for a situation in order to allow a borrower to do so. A common requirement is that the interest rate must have dropped at least a quarter of a percent. When you get the paperwork for your loan when you apply, your lender should provide you with a copy of their lock policy. Read the policy carefully and understand exactly what your options are so you can make the best choice for your loan. There can sometimes be additional fees associated with locking an interest rate, which can catch you by surprise if you’re not prepared for them.
With the above information, the only remaining variable to deciding when to lock your VA loan rate is market situation. Often, in this case it is wise to rely on the advice and perspective of your VA loan specialist, who can tell you if it seems that rates are on the rise and it would be smart to lock, or if rates seem to be declining and you may want to hold off. Whether the market seems likely to rise or fall is the largest factor in considering locking. If you’re not sure about market trends and don’t have someone you can ask, you can always ask the lender you are working with. While they can’t provide specifics about what is going to happen, they should have a sense of the market direction, and a good VA lender is going to be on your side and give you the best information they have available to you