In this article
- What is a Mortgage Rate Lock?
- Downsides of Failing to Lock the Rate
- How Rate Locks Work
- What to Do After Rates Fall After a Lock
- Mortgage Rates Today
- What to do When Locking Your Mortgage Rate
- How Long Does a Rate Lock Period Last?
- Is It Advisable To Use a Mortgage Rate ‘Float Down’?
- How Much Does a Rate Lock Cost?
- The Length Of The Lock Can Determine The Costs
- Pros of Mortgage Rate Lock
- Cons of mortgage rate locks
Mortgage rates out there tend to be unpredictable and dynamic, and they can easily change from the time you file the application to your closing. If you don’t want to deal with the uncertainty and want to retain the rate you got on your mortgage loan offer, then you need to lock the rate.
Interest rate locks can give you peace of mind as a borrower, but it isn’t a foolproof method – you can end up missing out on a lower interest rate after locking and your lock might not expire before you close.
What is a Mortgage Rate Lock?
When you get your loan offer, the lender is going to ask if you are interested in locking in the rate for a given amount of time or if you want to float it. When you lock the rate, the rate is going to be persevered provided you close before the lock expires.
If you don’t want to lock when you get the offer, the lender can give you some time- like 30 days – to request the lock, or you can choose to wait just before closing on your home.
It is a good idea to get different offers from different lenders because that is how you are going to have the option of choosing one offering the best one. Once you find a rate that works for you, lock it as soon as possible. It is hard to know if the rate is going to go up or down in the weeks to come. It can sometimes take a couple of months to close on the loan.
Downsides of Failing to Lock the Rate
If you fail to lock your rate, you might have to pay more in monthly payments on your loan. The interest rate is important because it is going to help you make a higher down payment or pay points. Paying an up-front fee can be a great idea because you are putting in more money initially, which is going to help get a lower interest rate.
Let’s say you are interested in a $200,000 loan for a 30-year fixed-rate mortgage. An increase from 5% to 5.5% means that you will have to pay an extra $60 a month, which is going to add up to $22,000 in interest over the loan term.
Rate locks are good because they take away the uncertainty when applying for a loan. It is going to have a big impact on your monthly payment. When you don’t have a rate lock, it is hard to know the final terms of your loan until the end of the process.
How Rate Locks Work
A rate lock is going to help you avoid financial uncertainty when buying a home because it is going to protect you if the interest rates go up.
Locks tend to be in place for about a month, which gives a lender enough time to process the loan. If the time runs out before your loan is processed, you might have to talk with the lender about an extension to pay the current rate.
There is also a possibility of the market rate going below the locked-in rate, but it is impossible to take advantage of the lower rate if you don’t have a “float down” option.
The interest rate on your loan can change even if you have locked the rate because of factors relating to the application like;
Appraisal of the property that is different from the estimate on your application
New down payment amount
The lender can’t verify income on your application
A decrease in your credit score because you took an unrelated loan or are delinquent on payments.
A lock agreement is going to include the rate, the date the lock is going to expire, the type of loan (such as a 15-year fixed-rate), and the points you might be paying towards it. it is better to get this in writing even though lenders can tell you these terms through the phone.
What to Do After Rates Fall After a Lock
If the interest rates have dropped after you have locked the rate, you can withdraw the current application and start a new one. There are risks involved with this approach with some being;
Losing money that you have already paid on appraisal and other costs, like credit checks; you will have to spend again when you make a new application.
Paying more to process the new application for lenders or brokers with high fees.
You have to wait longer to close on your home, which can complicate the purchase if the seller needs to close the sale by a given date. This is not an issue you have to worry about when refinancing.
If the difference between the current locked rate and the new rate is big, it might be a good idea to drop the loan application especially if you have only spent a few hundred dollars to get the rate. It is better to lose a few hundred and save thousands.
Mortgage Rates Today
Rates change regularly, so you need to check their movement before you apply for a loan and lock the rate. Remember that the rate you get is going to depend on things like creditworthiness. It is important to keep that in mind.
What to do When Locking Your Mortgage Rate
The best and most common time to lock the rate is when accepting the loan offer.
When you apply for a mortgage, you usually talk with the mortgage banker about terms and rates. If the mortgage rates are attractive to the borrower, many of them lock shortly after the application because they don’t want to risk higher rates.
If you feel like you have received the best possible rate and you worry about the rate increase, it is a good idea to lock it as soon as possible. If you are okay gambling that the rate is going to go down in the coming weeks, then the lender can let you wait and then lock it later. You need to find out if the lender lets borrowers lock it in at a later day and the restrictions that might come with it.
How Long Does a Rate Lock Period Last?
Rate locks can last between 30-60 days. It is a good idea to take the time and research more about how long it takes to close a loan in your area when talking about the length of the lock. If the lender is facing a backlog of mortgage applications as a result of the low rates, then it is best to go with the longest time possible.
When discussing the mortgage rate lock with a lender, you need to ask them whether they are going to prioritize applications for new home mortgage purchases over refinancing. If this is the case, you need to lock that period so you can cover the mortgage application process.
You also have an important part to play. Do your part to move the process faster by turning in the documents required by the lender, such as:
Proof of income
Banking account statements
Income tax returns
If you delay the process, you can end up with an expired lock before you close on your loan. If this happens, the lender can ask you to pay for an extension or split costs. There are times when the lender is the one at fault and thus has to cover the entire cost.
Is It Advisable To Use a Mortgage Rate ‘Float Down’?
This is going to make it more likely to end up with the lowest rate before you close on the loan. If you have locked the rate and the rate drops before you close on the loan, a float down lets you change the rate to the lower one.
You need to find out from the lender about the option before locking the rate. This allows you to know the rules that are going to apply, including the potential costs. There are some that have a policy where the rate has to drop by a given percentage point before making a change. Some charge you a fee when you want to move to the new rate and the loan needs to be conditionally approved pending further documentation requests.
Different lenders have different float-down policies and qualification requirements. A float down can be triggered when there is a significant move that is lower in a benchmark rate between the date the rate was locked and the closing date.
This is a good option if you have a lot of time before your loan closes and when the application process is pretty straightforward.
How Much Does a Rate Lock Cost?
You might have to pay for an interest rate lock, but most lenders out there are offering it for free. The charges can be a small percentage of your loan – such as .025% which is hundreds of dollars for a $200,000 mortgage loan – but the cost is going to be offset by the savings you are going to make on the life of the mortgage because you will end up with a lower interest rate.
The Length Of The Lock Can Determine The Costs
It is important for the borrower to find out if there are any fees charged by the lender and identify them before applying for the loan.
Pros of Mortgage Rate Lock
If you like the interest rate you got, you can keep it unless the lock expires or the loan changes before you close on the loan.
No need of worrying about changes to your monthly payments because you have already set the rate.
You avoid a last-minute scramble before you close if you need a higher down payment or a point purchase because of a higher rate.
Cons of mortgage rate locks
You can miss out on a lower rate that could have saved you thousands of dollars over the life of the loan.
When the lock expires, you might have to pay hundreds of dollars to extend or risk missing out on a lower rate altogether.