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Locking in your VA Mortgage Rate

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Locking the interest rate on a VA home loan protects you against any near-term spikes in rates while potentially saving thousands of dollars over the life of the mortgage. An interest rate lock guarantees that your rate will not change while your loan is being processed.

While the VA mortgage program backs home loans to veterans and their families, it does not set or lock interest rates on the loans – lenders set those terms.

“VA home loans are provided by private lenders, such as banks and mortgage companies,” explained VA spokesman Terrence Hayes. “The VA guarantees a portion of the loan, and that enables the lender to provide veterans, service members and eligible surviving spouses with more favorable terms to become homeowners.”

So, when you’re ready to lock in your VA mortgage rate, you’ll have to go through your lender. We’ll explain how that works in this post.

How to lock a VA mortgage rate

Interest rates change, sometimes rapidly, and in periods of severe market volatility they can rise or fall within the same day, noted Chris Birk, director of education for Veterans United Home Loans, a VA lender. According to Birk, locking the interest rate in turbulent economic times provides peace of mind, letting you concentrate on other aspects of the home buying process. But you have to ask — a lender won’t lock a rate without your written permission, and until you do, the rate will ride the waves of the market.

If you don’t lock in your rate, then rates could move up so much that you no longer qualify for the loan amount need for the house, Birk said. Although lenders may vary on their rate-lock policy, there are some common traits most home lenders share.

You have to have a loan application on file with the lender and a specific house in mind, Birk explained. Buyers typically start thinking about a rate lock once they have a contract on a house, he said. There’s really no reason to lock in an interest rate until you’ve signed a purchase agreement on a specific property.

The next step is watching where interest rates move and deciding the best time to pull the trigger on a lockdown. Your loan officer might be willing to call you with regular rate updates, but the responsibility for monitoring interest rates and making the call usually rests with the buyer, said Birk.

Knowing the best time to lock is a matter of following the markets and observing which way rates are moving. While your loan officer can help, as Birk said, you can also quickly look up daily interest rates online. Most home lenders and virtually all banks post daily updates on their websites about current interest rates for a variety of mortgage loans.

It’s important to know that some home lenders tack on fees for locking a rate, and the cost varies depending on how long the lock is in place. Generally, the shorter the amount of time, the less expensive a lock will be. Lock periods can be as short as five days and usually last no longer than 60 days, Birk said. By then, most lenders should be able to let you know whether you’re approved for a mortgage.

VA loan case number: Why it’s important

Lenders who originate VA mortgage loans must obtain a VA identification number for each loan. This 12-digit number is used to identify the borrower, the location of the property and the VA office closest to that property.

Having your VA loan number readily available can save time and reduce delays if you need to contact your lender with questions about a rate lock or any other issue with the VA mortgage process.

Float or lock?

Lenders will quote an interest rate when you begin the preapproval process on a VA-backed mortgage, explained Birk. However, you can’t set that rate until you’ve signed a purchase agreement, he said. Until then, you have what’s known as a floating interest rate, which can fluctuate in the weeks, or perhaps even months, leading up to closing.

Fees for locking your interest rate can range from free – for a short-term lock such as a week or less – to as much as half a percentage point of the loan amount for a 60-day lock. This means a $300,000 mortgage with a locked rate of 4 percent would come with an extra fee of $1,500 to lock that rate for 60 days.

While that might seem like a hefty up-front fee, it helps to look at the long-term financial picture. For example, with a $300,000 mortgage financed at 4 percent over 30 years, you’ll pay $215,609 in interest on the loan.

Suppose you don’t lock the rate and your interest rate creeps up to 4.5 percent before closing day? In that case, the interest over 30 years on a $300,000 loan is going to cost you $247,220. If you had locked in the 4 percent rate, in this scenario you would have saved $31,611 over the life of your mortgage.

Because mortgage interest rates can change daily, sometimes even hourly, by locking the rate you’ll get a guaranteed interest rate until you close on the house sale. The lock is good as long as you close the sale within the specified time frame and don’t make any material changes to your loan application.

Rate locks do have a downside, however. It may cost more money if the mortgage transaction ends up taking longer than the lock period. Worse, a rate lock may block you from getting a lower interest rate if market rates fall during the process.

Early in the mortgage processing stage, you’ll get a written loan estimate from your lender. Check the top of page 1 of your loan estimate (usually the upper right-hand corner) to verify whether your rate is locked, and if so for how long.

Even if your rate is locked, it may still go up if there are major changes in your application, such as the loan amount or any sudden changes in your credit score or verified income, the CFPB cautions.

Veterans United recommends asking these questions of any lender when considering a rate lock on a VA mortgage:

  • How long does the lock-in last? A lock-in is typically good for 30 days, but can go for only 15 days or as many as 45 or 60 days. The length of the lock is important — if the loan application process is delayed, you may not reach the closing date within the lock-in period. If interest rates go up, you could be looking at additional mortgage processing because the costs of borrowing will be higher.
  • Is there any fee for the lock-in? Some lenders charge for a lock-in, Veterans United points out, while others don’t. Some lenders only charge a fee for a lock-in past a certain time period, such as 30 days.
  • Lastly, ask for everything in writing.

Now that you’re protected, what do you do if rates drop?

Float downs

Since a rate lock is a binding agreement on both sides, according to Birk, there’s not much you can do if rates drop during the mortgage processing process, though he said it also depends on your lender. Veterans United as well as other – though not all – mortgage lenders are transparent in their lending terms, he said. With some lenders, you may need to ask questions.

Birk also noted that some VA mortgage lenders allow a one-time float down to a lower rate at no extra charge if interest rates fall during your lock time. You may need to add a float-down provision to your lock contract to get this extra layer of protection, he said, although some lenders may do a float down once as a courtesy. Lenders usually won’t consider a float down unless market rates have dropped at least a quarter of a percent, he said.

As with every other aspect of the mortgage application process, you’ll want to review and understand your lender’s lock policy before you sign. The decisions you make from that information could potentially save you thousands of dollars on what will likely be the biggest single investment of your life – your new home.

Learn more: VA loan growth over time

The VA’s home loan program was established by Congress in 1944 in anticipation of veterans returning from World War II in Europe, although the Pacific campaign would rage on for almost another year. The purpose of the program was to put returning military personnel on a level playing field with civilians during the post-war economic boom that would continue into the 1950s. By insuring the mortgage loans, the VA has been able to encourage lenders to offer more favorable interest rates to veterans and their families. Since the program’s launch, the VA has guaranteed more than 18 million home loans.

And it’s still growing — the annual volume of VA mortgage originations more than doubled from $75 billion to $155 billion between 2009 and 2015, as the U.S. economy began its slow recovery from the Great Recession, according to the Urban Institute, a nonprofit research organization.

Since 2009, the VA has also become a significantly larger player in the overall government-insured housing market, which includes the Federal Housing Administration and the U.S. Department of Agriculture. The VA’s share more than doubled from 17 percent of a $450 billion market in 2009 to 36 percent of a $436 billion market in 2015. Even as the broader mortgage lending market declined during those six years, the VA mortgage program has only increased. Total VA mortgage volume has jumped 370 percent since the financial crisis began a decade ago, spurred partly by the lower interest rates available to veterans, according to Veterans United. The VA program sets lower credit requirements than traditional lending options, and lets military borrowers buy a home with little or no money down, among other benefits.

What the program cannot do is establish and lock down the interest rate on a mortgage — that’s where dealing with your lender comes in.

 

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