SANTA CRUZ (January 11, 2009) - Mortgage rates are dropping and homeowners are anxious to take advantage of these historically low rates. The process of refinancing is not dissimilar to the loan process homeowners went through when they purchased their home. We need to review the borrowers’ income and asset documentation, we will order a credit report and we will arrange for the home to be appraised.

Prudent homeowners who are considering refinancing or are wondering if it makes sense or not will need to discuss their situation in detail with a mortgage professional. If you were satisfied with the service that you received the last time you obtained a mortgage, give that person a call. Your accountant or financial planner may also be a good person to discuss the prospect of refinancing with.

Once you have determined that refinancing makes sense, you need to get the process started. Since the mortgage industry is all of a sudden inundated with refinance requests, the loan process could take 20 - 30 days or even more to complete.

A home buyer who is in contract to buy a home or a homeowner who is refinancing may typically lock in an interest rate up to 60 days before their transaction is due to close. This means that today’s interest rate may be preserved even though interest rates may increase during the escrow period.

To lock in a rate, there must be an address, a loan amount, an interest rate and a fixer period of time that that rate will be honored. The standard lock-in period is 20 - 30 days. If we are asked to lock in a rate for longer, there will be an extra charge of an additional one eighth to one quarter of a point in loan fee. For a $400,000 mortgage, that amounts to an increase of $500 - $1000 in closing costs. If rates were increasing, this additional expense can be well worth it and could save the borrower tens of thousands of dollars over the life of the loan in reduced mortgage interest paid; however, if rates are decreasing, there may not be a need to lock in for longer than 20 - 30 days.

The process of locking in an interest rate typically involves a verbal agreement between the home buyer and mortgage originator. When an interest rate is locked-in, the lender will honor the rate even if rates increase. Conversely, the lender will expect the borrower to honor that lock commitment even if interest rates drop.

In order to take advantage of a locked-in rate, the loan must be fully approved and the refinance or purchase transaction must fund by the expiration date of the lock period. If, for some reason, the transaction is not ready to close by the expiration date, the lock period may typically be extended for an additional fee.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.