Using Interest Rate Lock In To Protect Your Mortgage From Rising Interest Rates

By Alvaro Moreira
10 min read

Numerous economic and political issues may cause mortgage interest rates to rise and fall quickly from one day to another and one hour to another. According to financial experts, the variability of interest rates is set to continue throughout 2022.

Indeed, analysts expect mortgage interest rates to go up this year as the demand for housing increases and the supply of newly constructed houses remains low. In addition, the fluctuation of the fed funds rate and other market forces will most likely see borrowers pay higher interest rates on their mortgages.

As it happens, slight increases in mortgage interest rates can significantly inflate the size of the debt, jeopardizing the borrower’s ability to retire the outstanding mortgage or secure a favorable refinancing route. You may need a mortgage rate lock—to safeguard you from the excessive interest rate increments by freezing your mortgage’s interest rate at a fixed point.

The following is a brief illustration of how a mortgage interest rate lock works, the benefits of locking your mortgage interest rate, and the ideal opportunities when borrowers can take out a mortgage rate lock.

interest rate

The Meaning Of A Mortgage Rate Lock

A mortgage rate lock, also known as rate protection, prevents the interest rate on your mortgage from rising between the time you apply for the loan and the time you repay your new loan in full or at loan closure.

This facility enables mortgage borrowers to secure low mortgage rates when they need to refinance their loans or finish the purchasing process of their homes. Additionally, a rate lock ensures your mortgage’s interest rate is constant even when interest rates in the money market are soaring.

On the downside, if a borrower locks in their mortgage’s interest rates and interest rates in the market drop, the borrower cannot benefit from the falling interest rates unless the rate lock contains a float-down option. A float-down option enables the mortgage borrower to profit from falling interest rates throughout the rate lock duration.

Borrowers given a maximum of 90 days to shop for and buy their ideal home using a mortgage facility with a locked interest rate can lower their interest rate only once if market interest rates fall. However, if the interest rates have gone up, the borrower retains the interest rate they locked in during the loan application stage.

Causes Of Mortgage Rate Fluctuations

Various factors and market forces determine the stability of interest rates. Some of the factors that are likely to cause a rise in interest rates in 2022 are:

Economic Growth

When the economy is expanding, interest rates usually go up to limit the amount of money supply in the economy. However, when the economy contracts, interest rates drop to encourage borrowers to take up loan funds and bolster economic growth.

Variation Of The Federal Funds Rate

The federal funds rate refers to the interest rate at which banking and financial institutions borrow funds from the treasury department. The Federal Reserve regulates the Federal Funds Rate through monetary policies, consequently affecting the interest rate on your mortgage.

The Federal Reserve increases or lowers the Federal Funds Rate to manage inflationary pressures in the economy. Increasing or lowering the federal funds rate will raise or lower interest rates, significantly impacting short-term loans such as credit cards or mortgages with a variable interest rate.

Demand For Mortgages

The demand and supply of mortgages affect mortgages’ affordability (interest rate). Interest rates rise when many individuals want to buy their homes using a loan. On the other hand, if demand for mortgages plummets, interest rates will also fall to stimulate mortgage uptake among potential homebuyers.

Mortgage-Backed Securities

Mortgage lenders usually pool together mortgages and other real estate loans to create mortgage-backed securities (MBS). Interested investors buy these mortgage-backed securities from the bond markets and earn money when homeowners pay back their outstanding mortgages. This means the interest rate on the mortgage determines the value or price of mortgage-backed securities.

We are already seeing interest rates start to rise from their record low levels as the Federal Reserve seeks to lower inflation. Furthermore, the aftermath of the COVID-19 pandemic has reduced the construction of new houses, while the demand for housing and the likelihood that the Federal Funds Rate will increase remain high. This is why it makes sense to lock in your mortgage interest rate before rates rise.

Today is the best time to lock in your mortgage’s interest rate—get your preapproval now before interest rates rise further.

The Duration Allowed To Lock In Your Mortgage’s Interest Rate

Once the borrower locks in their rate, it remains fixed for a particular duration. However, the length of the duration depends on the type of mortgage, your area of residence, the terms of the loan, and the mortgage provider you are dealing with.

Usually, many rate locks last for about 15 to 60 days. If the interest rate lock ends before the full settlement of the mortgage, the lender may allow the homeowner to prolong the lock period after paying a fee. If not, the homeowner will settle for prevailing interest rates before closing the loan.

The mortgage lender may cancel your rate lock if your loan application or financial circumstances change. This is because the interest rate on your mortgage depends on your income and credit levels—changes in your income and liabilities affect your eligibility to secure a favorable rate on your mortgage.

For instance, taking a new line of credit when applying for a mortgage might rework your credit rating or debt-to-income ratio (DTI), forcing the mortgage provider to reassess your suitability for a mortgage and a low-interest rate on the mortgage.

The Best Time To Lock In Your Mortgage Rate

A borrower who wants to lock in their mortgage’s interest rate can opt to secure the interest rate from the time they finish applying for the loan to 5 days before closing the loan. Nonetheless, your mortgage’s interest rate lock comes with an expiry date. Upon the expiry of the rate lock, the interest rate on the mortgage will begin to rise and fall, notwithstanding if the borrower has finished refinancing or buying their home.

The mortgage borrower needs to set their mortgage interest rate lock properly to reap maximum benefits from low-interest rates and low annual percentage rate (APR) on their new mortgages.

To determine if they locked in their mortgage’s interest rate properly, mortgage borrowers may need to carry out a little research to establish how interest rates have been performing in the recent past. For instance, if interest rates have been increasing, it is best to lock in their rate as soon as the lender approves their mortgage application or refinancing plan.

If interest rates have been falling, allowing your mortgage’s interest rate to float freely (not locking it in) may be the best option. Also, note that floating your mortgage’s interest rate can be detrimental to your financial health as a slight rise in interest rate can cost you thousands of dollars during the loan duration.

Importance Of Locking Your Mortgage Interest Rate

Most mortgage borrowers want to know if they should lock in their mortgage’s interest rate now or delay it until their loan closes. If you are content with the interest rate on your mortgage, it is always a brilliant idea to lock in the rate once the mortgage lender has approved your application. You may use your monthly mortgage payment to gauge if you are comfortable with the interest rate on your mortgage before you lock it in.

If you consider floating your mortgage interest rate, start by evaluating how much you will pay on your loan when interest rates go up. Remember, a slight rise in interest rates can massively increase your annual mortgage payments. By locking in their mortgage rates, borrowers get peace of mind, knowing their monthly loan repayments are predictable.

Although locking mortgage rates can improve the affordability of mortgage facilities, borrowers must confirm if their mortgage lender charges extra fees for this option. Some banking and financial institutions are likely to ask for rate-locking fees based on the borrower’s mortgage type. Mortgage lenders may allow borrowers to pay interest rate lock fees at the loan application stage or together with the closing fees.

How To Lock Mortgage Interest

Locking your mortgage rate when interest rates are snowballing is central to profiting from optimum interest rates. Luckily, prospective homeowners who want to lock in their mortgage rates can do so online with the help of the Moreira Team.

Here are the steps to locking in your mortgage rate:

Register by setting up an account. After deciding whether you want to buy or refinance your home, you need to consult your home loan professional and provide details about your assets, income, and debt levels. If you do not have an account, start setting up your account today.

Research and evaluate the suitability of the popular mortgages in the market: Spare some time to crunch the numbers using a mortgage calculator and estimate your monthly payments based on the prevailing interest rates. For added accuracy, ensure you use numbers that reflect your financial position.

Confirm if you qualify for the mortgage facility you have selected. Once you are set to get your mortgage, the lender will need you to hand in an application for the type of loan facility you are looking for. Ensure you provide all the requisite documents together with your personal data.

Lock in your mortgage interest rate online. After your mortgage lender has preapproved, you and you are comfortable with the rate on your mortgage. Then it is time to lock in the rate and relax as you wait to close your mortgage. The Moreira team is available 24/7 to help you lock in the interest rate on your mortgage anytime you want.

FAQs For Mortgage Interest Rate Lock

In this part, we have provided answers to some of the common questions from prospective mortgage borrowers on locking in mortgage interest rates. We hope to answer how, why, and when mortgage borrowers should use an interest rate lock to boost their mortgage.

Is it advisable to lock my mortgage interest rate in 2022?

Forecasts by housing experts indicate that interest rates on mortgages will continue to increase in 2022. A mortgage interest rate lock will safeguard your income against erosion by the high-interest rates expected this year if you consider getting a mortgage.

It is essential to lock in your low mortgage rate today! Get your preapproval now before interest rates rise higher.

Begin My Preapproval Process Here

What is the cost of locking in a mortgage interest rate?

Typically, mortgage lenders do not charge a fee for an initial mortgage rate lock. Instead, the lender includes the cost of your mortgage’s interest rate lock in the interest rate itself. However, borrowers are likely to pay more to prolong their interest rate lock or renew it after the first duration expires. 

Mortgage lenders often charge a fee to re-lock or extend the lock by adding a few mortgage points to the loan’s interest rate, increasing marginally. Remember to ask your lender about their policies on fees, the duration of lock, and extension possibilities—these details may differ by lender or mortgage type.

Can the type of my mortgage affect the rate lock?

Various mortgage types can influence specific details of your mortgage interest rate lock. For example, some loan types do not qualify for a rate lock, while others may not permit the borrower to extend the lock. Additionally, different loan types have different processes—these processes determine when the borrower can lock in their interest rate.

Can I get a mortgage rate lock lasting for 90 days?

Mortgage financiers allow borrowers to lock in their mortgage rate for a long time, such as 90 days. In most cases, interest rate locks last for 15 and 60 days. Note that extended (long-term) rate lock durations could cost more.

What should I do when my mortgage rate lock expires before closing?

If an interest rate lock ends before the borrower closes their loan, they may choose to pay to extend the rate lock or close the mortgage with the current interest rate. If you do not want to make unnecessary payments when extending your rate lock, ensure you talk with your mortgage lender. Mortgage providers are best suited to advise you on the best interest rate lock for your loan because they know how long the mortgage borrower needs to pay off the loan entirely.

Conclusion

The demand for and supply of housing units is one of the leading causes of interest rate variation. Other factors that affect your mortgage rate include your financial position, the down payment on your loan, and the loan size.

A rate lock is beneficial because it allows mortgage borrowers to secure or refinance the loan and pay reasonable monthly payments. It provides borrowers with risk cover, peace of mind, and added financial muscle to refinance or buy homes more confidently.