It is no news that homebuyers want to obtain the best interest rate when looking for a mortgage to buy or refinance their house. The last thing you’d want is for the rate to skyrocket before you close on the loan.
As interest rates fluctuate constantly, a mortgage rate lock is one of the many tools you can utilize to protect yourself from rate hikes while waiting to close on your loan.
What Is a Mortgage Rate Lock?
A mortgage rate lock (also referred to as “rate protection”) is a tool that allows you to lock an interest rate for a specific period. In a nutshell, it is a guarantee by a lender to a borrower that their given mortgage interest rate will stay the same for a set period regardless of market changes.
Mortgage rates fluctuate daily due to various external factors such as mortgage demands, federal fund rates, and economic activity. Because of this, the rate you obtain at the time of application may not be the going rate at the time of closing.
For instance, if your lender locks in your rate at 3.54% for 45 days and rates rise to 4% within that period, you’ll still get your loan at the lower rate with a mortgage rate lock in place. Mortgage rate lock provides loan consumers with a sense of security.
When Should You Lock in A Mortgage Rate?
When to lock in a mortgage rate depends on both the lender and borrower. Some lenders will allow you to lock in the interest rate once you are pre-approved for a loan. Others may wait until the seller accepts your offer.
However, finding the right time to lock in a rate as a borrower is significant. If you lock too early, you might exceed the expiration date and end up with extension fees or deal with higher interest rates. Keep in mind that a lender may void the agreed rate lock if specific information on your credit or loan application changes before the underwriting process ends.
Why Should You Lock in A Mortgage Rate?
Below are some of the reasons why mortgage rate locking is popular among mortgage loan consumers.
- With your rate locked in, you can easily focus on the more important aspect of the loan process rather than watching the ups and downs of the mortgage interest rates market.
- You are assured of your interest rate and in a better position to determine the amount of house you can afford.
- A mortgage rate lock allows you to extend the lower interest rate for a lengthy period.
You may want to research the current movements of interest rates. If rates have been increasing, you should lock in as soon as you are pre-approved. If the rates have remained relatively stable or have been dipping, locking in a rate might not be your best move.
How To Lock a Mortgage Rate?
Locking in the correct mortgage rate plays a huge role in determining your monthly payments over the life of the loan. Your lender will most likely offer a rate lock after your initial loan application has been approved. You can also ask for a rate lock as the borrower. Here’s how to lock a mortgage rate:
- Evaluate your current homebuying process. Typically, the best time to lock is when you have a signed purchase agreement for a home purchase. Meanwhile, when refinancing a mortgage, you should lock in a rate when submitting your loan documents.
- Find out more about the various locking fees.
- Ask your lender for a rate lock agreement.
- Determine how long you want the rate lock to last. Remember to consider how long it will take you to close on the loan before choosing a timeline.
- Ask your lender about the cost of extensions and ensure to read the fine print before putting down your signature to any agreement.
How Long Should the Lock Last?
On average, lock periods range from 15 to 60 days and sometimes even longer. After the expiration of the 60 days, some lenders may offer to extend the rate lock deadline for free or charge a certain percentage as an extension fee.
Before choosing a lock-in period, research the average time of loan processing in your area. Ask your lender to estimate the timeframe needed to complete the entire process and compare the information with other local mortgage professionals.
How Much Does a Mortgage Rate Lock Cost?
Many lenders do not charge a fee for locking a mortgage rate or rate extensions. However, those who do typically charge between 0.25% and 0.50% of the total loan amount for a rate lock of 60 days or less. For rate extensions, it’s generally between 0.06% and 0.375%.
Here’s an example. If you plan on borrowing $300,000, you may have to spend around $750 to $1,500 for the initial lock and $180 to $1,250 for an extension. While most lenders do not charge a separate fee for rate locks, the rate you are offered often includes the rate lock cost.
Downsides Of Locking the Rate
Rate locks can be quite helpful but come with their share of disadvantages. Here are two reasons why you should think twice before locking an interest rate:
- Rates fluctuate, and you have little to no idea if the rates will decrease before you close on your home loan.
- If interest rates fall, you’ll have to go with the locked mortgage interest rate and miss the lower rate. You can not get a lower interest rate unless the actual lock rate agreement has a float-down provision.
What’s A Float Down Lock?
A float-down lock is a provision that grants borrowers the right to relock another rate if there is a fall in interest. It is a one-time option that helps borrowers prevent a significant disadvantage associated with mortgage rate locks.
Typically, most lenders will charge an additional fee of around 0.5% to 1% of the total loan amount to relock rates to current mortgage rates. The amount your locked-in rate will reduce depends on the lender, market conditions, and qualifications.
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Elijah O. Agor, CFP
Elijah O. Agor is a real estate, 1031 exchange, and mortgage writer. He is a certified financial planner, former loan originator, and chief realtor for Dsquared Realty. In the past, Elijah advised first-time and seasoned home buyers on real estate and mortgage decisions in the Greater Atlanta area. Since hanging up (burning) his suits and ties, Elijah now works to make mortgage and real estate topics understandable and jargon-free.