A mortgage rate lock can save you thousands of dollars especially when mortgage rates for a 30-year fixed period are at 7.12%. This is more than double its 3.22% level in early 2022. The rates for a 15-year fixed period are at 6.55%, which was at 2.43% in early 2022.
This blog discusses the complete ins and outs of a mortgage rate lock. And, how it allows borrowers to best manage their money while buying a house.
🚀 Key Takeaways
- Protects Borrowers: A mortgage rate lock protects borrowers from the risk of fluctuating interest rates.
- Lock-in Period: Typically, the lock-in period is for 30 and 60 days. However, depending upon the lender, you may get an extended period.
- Be Thorough with the Research: Before locking in a mortgage rate, its crucial to factor in all the costs and see if you can afford a mortgage or not.
- Lock in fee: If there’s a lock in fee, you can pay it upfront or include it in your closing costs.
What is a Mortgage Rate Lock?
A mortgage rate lock is an interest agreement between the lender and the borrower. It shows that the lender and the borrower have agreed upon a specified interest rate for the entire mortgage period. It protects the borrower from interest rate fluctuations.
The lock period lasts from the initial loan approval till the time you close on your loan. While an interest rate lock protects you from an increase in interest rates. It doesn’t allow you to take advantage of decreased interest rates unless your agreement includes a float-down option.
When Should You Opt for a Mortgage Rate Lock?
You can lock your interest rates from the initial loan approval to 5 days before closing. It depends upon the lender, some might want the seller to accept the buyer’s offer. And, some might lock your rate right from when they send you the loan estimate.
Remember, rate locks come with 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 ask the rates for 30, 45, 60, and 120 days. If any term longer than the 60-day period gets expensive, better schedule your lock-in close to your closing. The lender can nullify the agreement if there’s a certain change in your credit reports or mortgage application.
How to Lock in a Mortgage Rate?
You can’t lock in your mortgage until the lender has reviewed your financials. The lender may ask for the following documents:
- Credit Report
- Last two months of bank statement.
- Last two months of investment statement.
- 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.
After verifying the above documents, the lender will quote an interest rate to you.
How Much Does Mortgage Rate Lock Cost?
Typically, there’s no separate cost attached to the rate lock. The interest rate already includes any such costs. However, if you do pay a lock-in cost, it varies on multiple factors. These factors include the lock-in period, mortgage amount, and term of the loan.
These 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?
If the interest rates rise, a mortgage rate lock is definitely worth it. Say, a $400,000 house financed at 8% for 30 years with a 25% down payment. If the interest rates rise by 20 bps. It will increase your monthly payments by $50 per month.
Five years down the line you would’ve paid $3000. $2400 more as compared to $600 to lock in the rate. Moreover, not locking the interest rates can cause difficulties in getting the credit.
If your payment increases due to higher interest rates. The lender may ask you to pay more money upfront to meet the lending requirements.
How Long Can a Mortgage Rate Be Locked For?
The lock duration depends on the lender. Typically, there are 30 and 60-day lock-in periods. However, some lenders may extend this period up to a year. This of course comes at the cost of paying an extension fee.
Factors Affecting Mortgage Rates
The following factors affect the mortgage rates:
Economic Changes
A prospering economy causes the interest rates to rise. Whereas, when the economy is slow, the interest rates tend to go down as well. This occurs in the hope of getting the economy back on track.
Federal Funds Rate
The Federal Funds Rate is the rate at which banks and other financial institutions borrow money from the Federal Reserve. The Fed 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. If the demand for homes increases the interest rates also increase. If the demand for homes decreases the interest rates also decrease.
Should You Lock in a Mortgage Rate?
Most people remain unsure if they should lock in the mortgage rates or not. The simple answer to this is, that if you feel satisfied with the offered mortgage rate, you should lock it. Ensure you’re comfortable with the monthly amount of your mortgage payment.
If you don’t lock in a mortgage rate, consider the impact of higher interest rates on your monthly expenses. Even the slightest rise in the interest rate can add hundreds of bucks to your monthly expenses.
Before you lock in a mortgage rate. Be thorough with the research on the lender. Scan for any costs associated with the rate lock-in. In some cases, there is a lock-in fee depending on the type of your mortgage. You can include it in your closing costs or pay it in advance.
Frequently Asked Questions
1. What if I Lock in a Rate and It Goes Down?
You can change your lock-in rate if the interest rates go down. This process is called "Repricing". The lender charges a certain percentage of your loan amount to provide this facility. Moreover, at the time of locking in, you can opt for floating-down to avail the benefits of decreased rates.
2. Can You Back Out of a Mortgage Rate Lock?
Yes, you can back out of a mortgage rate lock but there are downsides. You will lose all the time and money invested till now. You'll have to restart the loan application process from scratch. This decision may also jeopardize your home-buying process as there may be a delay in loan approval.
3. Does a Mortgage Rate Lock Expire?
Yes, if your mortgage rate expires, you must relock it before closing. That way your lender may give you the current market rate or the previously locked rate, whichever is higher.
4. Can I Extend a Mortgage Rate Lock?
You can extend your rate lock at a fee. The lender provides this facility by charging a minimal fee which is usually a certain percentage of the loan amount.
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