The news is full of reports of rising interest rates and lower loan volume at lenders. But these factors have contributed to a 24% drop in the time it takes to close a loan, saving you money and offsetting some of the increased cost of rising rates.
In December 2012, it took 55 days to close the average loan in the U.S., according to a report by Ellie Mae, a loan origination software company that is used to close 20% of loans nationwide.
In November 2013, it took an average of only 42 days – a 24% drop from the peak.
Shorter Closing Timeframes Save Borrowers Money
It’s true that rates have been on a steady rise since December 2012. But although the 30-year fixed rate has risen an average of 0.91% since that time according to Freddie Mac, the rising cost of mortgages is somewhat offset by shorter closing times.
That’s simply because it costs more to lock a loan longer.
The wise consumer will lock their purchase or refinance as soon as possible to avoid upward rate swings during the mortgage approval process. Loan officers give borrowers the estimated time it will take to close their loan about the time of a completed application.
If mortgage processing times are long, the loan officer will advise a longer lock period, for instance 60 days instead of 45. That’s one option.
The other option is to float the rate, meaning the loan is subject to any market swings between the beginning and end of the loan process.
But if the borrower chooses to lock 60 days instead of 45, it can get expensive. But that’s exactly what is needed when it takes longer to close a loan.
How Much Does a Longer Lock Cost?
It costs between 0.125% and 0.25% of the loan amount for every 15 extra days on a lock. So someone locking for 60 days instead of 45 days would pay between $312 and $625 for that extra 15 days on a $250,000 mortgage. Someone with a $400,000 mortgage would pay between $500 and $1000 for the extra time.
Worse, if you only lock for 45 days, but end up needing 60, you’ll need a lock extension. Adding on to an existing lock is more expensive than a longer lock initially. To get an extra 15 days, a borrower would need to pay around 0.50% of the loan amount for an 15 extra days – or $1,250 on a $250,000 loan. On a $400,000 loan, the lock extension would cost a whopping $2,000.
So don’t let higher interest rates ruin your plans to buy or refinance. Higher rates mean shorter processing times at mortgage companies across the U.S.. That can equal big savings to the average consumer.
More Mortgage Companies Adopting new Technology
Another factor contributing to quicker application approval times is the adoption of paperless mortgage software. An increasing percentage of mortgage companies have adopted systems that store and organize borrower files electronically instead of in the form of a paper file.
How does this speed approval times? Many mortgage companies have branches spread over different cities and states. Underwriters are in some offices, funders in others. Shipping a paper file around over large geographical areas for each part of the loan approval process takes time and money.
Lenders have cut out this time with paperless systems. For the first time in history, the loan officer, underwriter, and funder can be looking at the same file at the same time, but be separated by hundreds of miles.
No need for costly lock extensions or longer lock periods due to shipping the file around to various locations.
Saving just 1 day of approval processing time with a paperless system could save you thousands.
Apply and Lock Soon for Most Advantageous Conditions
There’s little doubt that the current lending environment offers a winning combination of speed and affordability. Borrowers who have waited to be eligible for a refinance or to purchase a home should call a lender to get preapproved, and lock in their loan.
Locking your loan in now requires a shorter lock period, quicker approval times, and a less stressful experience.