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What Is a Mortgage Rate Lock?
Are you in the process of buying a home? If so, or if you plan to venture into home buying in the near future, you should brush up on how the mortgage rate lock process works. This process gives you control of how much your mortgage loan interest rate will be, and it can help you make clear decisions about the home buying process.
A mortgage rate lock allows you to lock in the interest rate you want for a certain amount of time, rather than dealing with changes in the market as you’re waiting to close on your loan. Rate locking is a common practice, and most lenders offer it to borrowers during the loan process.
Locking in your rate will help you take advantage of the lowest rate you’re offered without having to worry that you’ll lose it due to market fluctuations. That buys you time to get your loan closed on without fear of paying more than necessary in interest.
What is a mortgage rate lock?
Mortgage interest rates adjust with the overall economy and stock market, since the demand and supply of available money to lend changes all the time. Lenders make the decision to approve you for a given interest rate based on the information they have at the time, but they know you have to make decisions based on the number you get.
[ See: How Much House Can I Afford? ]
As a result, some lenders will even offer or automatically create a mortgage rate lock, where you get your rate — for example, a rate of 3.75% — for 30 or 60 days, no matter how the rates fluctuate thereafter.
If the rates go down after you lock in, the lender gets a bit of an advantage. If they go up, you get the advantage, but either way, both of you will benefit from the certainty of knowing your rate.
How does a mortgage rate lock work?
A mortgage rate lock isn’t really free. There is usually some form of fee rolled into the overall rate you are getting, which is usually noted in the fine print. You can ask if your rate would be different without an automatic lock of some kind, and your lender can tell you whether rate locking is standard for them or if there are other options.
If, for instance, you are offered a 3.75% rate locked for 30 days and closing is delayed past that, you’d have to adjust the rate or pay for an extension. If your rate lock offer is close to expiring, you get to make a decision: do you want to try to extend it, potentially adding a small extension fee to your overall loan costs? Has the market changed in your favor, making a 3.5% or lower interest rate now possible? In that case, you’d be better off letting your rate expire and getting a better rate.
There are a few elements of rate locks that you may want to think about early in the process. For example, is the overall market fluctuating a lot, or are interest rates in a sharp incline or decline? This information cannot forecast the future, but it can help you decide whether a rate lock makes sense for you.
You can also inquire about a rate lock with an optional one-time float-down, which is the chance to lower your rate one time during the lock if rates drop. You’ll likely have to pay a fee for this, but it might be worth the money if you are worried about locking in an interest rate that turns out to be too high.
How do I lock in a mortgage rate?
During your initial conversation with your lender, you should ask what the lender policies are for locking in mortgage rates. This should include asking the associated costs, how long the lender will lock in a rate for and what the cost there is for extensions if your closing is delayed.
[ Next: First-Time Homebuyer Programs and Grants ]
Once you’ve determined that you want to work with the lender, get the terms in writing as to what your interest rate is, whether you have an optional float-down and what the costs to extend the rate lock would be. Try to move quickly toward closing if you are happy with your mortgage rate in order to avoid having an extension cost.
Once you’ve locked in your rate, you might be better off second-guessing your rate unless you have the option for a float-down. If rates go down at that point, you don’t want to beat yourself up for locking in your rate when they were higher. A refinance is an option in the future, if rates fall enough to make that a worthwhile choice.
When should I lock in a mortgage rate?
Once you have an accepted offer on a house, you’ll need to make the decision whether to lock your rate or not – until this point, you can’t lock a rate in most lending situations. While no one can tell you exactly what will happen with mortgage rates, you can look at the recent trends, which your lender or other financial experts can help you find and follow. A lender may suggest that a lock is a good idea, but you’ll need to weigh your own factors as well.
Make the decision about locking in your rate based on:
- How sure you are that closing will happen as planned
- How long of a lock you’re looking at — the longer the lock, the more expensive it can get
- Whether rates are currently trending up; rates that are trending down make it more appealing to wait
If rates have been at historic lows over the last few months, for instance, and they start to go up, you are wise to lock in a rate early on, since there is a lot of room for them to increase.
If you know that closing is scheduled in 15 days with no red flags visible, and you notice that the rates took a dip today, it might be a good day to lock in the loan rate. The closer you get to the closing, the cheaper the lock will be, since there is less time for the market to change and take profit away from your lender.
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