Mortgage Rate Lock: What It is and How Much You Can Save

What Is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between the lender and the borrower upon a specific interest rate. The agreement lasts for the entire mortgage period. It protects the borrower from the interest rate fluctuations.

The rate lock doesn’t allow you to take advantage of lower interest rates unless your agreement includes a float-down option.

When Should You Opt for a Mortgage Rate Lock?

You can lock in your mortgage interest rate from the time you receive initial loan approval until five days before the closing. Some might lock in your rate when they send you the loan estimate. Whereas, others may wait for the seller to accept your offer.

Moreover, rate locks have an expiration date, after which the interest rate may fluctuate. It is crucial to schedule your lock-in rate at the right time to ensure a lower interest rate. Lenders typically won’t offer you a lock-in for less than 30 days unless you’re ready to close.

You should opt for a lock-in period that lasts for 30, 45, 60, and 120 days. If any term longer than 60 days gets expensive, it is advisable to lock in the rate near your closing date. The lender can void the agreement if there’s any change in your credit reports or mortgage application.

How Do I Lock in a Mortgage Rate?

You can’t lock in your mortgage interest rates until the lender reviews your financial records, such as:

• Credit report
• The last two months of bank statements
• The last two months of investment statements
• Social Security Number verification
• Last 1-2 years of tax returns
• Last 1-2 years of tax forms
• Pay stubs for the past 30 days
• Personal ID such as a driver’s license

The lender will quote you an interest rate after they verify the documents.

»Also Read: 15 vs. 30-Year Mortgage: Find Out What’s Best For You

How Much Does a Mortgage Rate Lock Cost?

While some lenders charge for loan locks, others can provide them without any cost. However, the cost is already included in the rate that the lender offers you.

Also, if you do pay a lock-in cost separately, it varies depending on multiple factors. These factors include the lock-in period, mortgage amount, and term of the loan.

The lock-in rate costs are measured in basis points (bps), such as 20 bps, or 0.20% of the loan value. For instance, a 20 bps rate lock on $150,000 will be $300.

Is Mortgage Rate Lock Worth the Cost?

It is advisable to lock the interest rates if there’s a hike. For instance, if a $400,000 house is financed at 8% for 30 years with a 25% down payment and there’s a 20 basis point rise in interest rates, your monthly payments will increase by $50.

With reference to the above example, after five years, you would’ve paid $3000 due to the increased interest rates. That is $2400 more as compared to the $600 that you should’ve paid to lock in the rate.

Moreover, if you don’t lock in the interest rates, the lender may ask you to pay more money upfront to meet the lending requirements.

How Long Can I Lock in a Mortgage Rate?

The mortgage rate lock duration depends on the lender. The lock-in period lasts for 30, 45, 60, and 120 days. However, some lenders may even extend the period to a year and charge an extension fee for it.

Factors Affecting Mortgage Rates

There are several factors that affect mortgage rate locks:

Economic Changes

Mortgage rates rise when there’s an economic upswing. Whereas, when the economy is in decline, the interest rates tend to go down. This fluctuation in interest rates occurs in the hope of improving the economy.

Federal Funds Rate

The federal funds rate is the rate at which banks and other financial institutions borrow money from the Federal Reserve. The Federal Reserve influences the mortgage rates by controlling the federal funds rate. The Fed also manipulates the federal funds rate as an inflationary measure.

Mortgage Demand

The laws of demand and supply majorly affect mortgage rates. The price of borrowing money rises along with the demand for properties. Also, interest rates will drop if there is less demand for homes.

Bottom Line

Most people remain unsure if they should lock in the mortgage rates or not. If the mortgage rate offered fits in your budget then it’s wise to lock it.

Moreover, you may have to bear high-interest rates on your monthly expenses if you don’t opt for a rate lock. Even the slightest rise in the interest rate can increase your monthly expenses.

Before you lock in a mortgage rate, do thorough research on the lender. Scan for any additional costs with the rate lock. Sometimes there is a lock-in fee, depending on the type of mortgage. You can include it in your closing costs or pay it in advance.

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