When you begin the mortgage process, you’ll find out that the day you lock your rate is very significant. Because on this day, you’ll be determining your mortgage’s interest rate for the next 10 to 30 years. So what exactly is a rate lock?
A rate lock is an agreement between you and your lender that your interest rate will be reserved on your behalf for a specific amount of time.
Once your application is approved by your lender and you have a property address, you’ll be offered the chance to lock your interest rate. You can choose to do so right away, or you could lock any time up until a few weeks prior to closing.
Some lenders charge to lock, while others offer this opportunity for free. Atlantic Bay, for example, does not charge a fee to lock your rate for a standard amount of time on most loan programs.So let’s suggest you were offered a 3.5% interest rate on the day you lock your rate and you close before that rate lock expires. This means you’ll have a 3.5% interest rate on your mortgage, even if the market rate is higher on the day you close.
Why is locking your rate important?
Interest rates can change daily, and sometimes even multiple times a day. And here’s the thing about your interest rate – even a small change in rate could mean thousands of dollars over the life of the loan. Your rate plays a huge role in your mortgage, including what you’ll pay each month and what you’ll pay in interest over the life of the loan.
With that said, the rate you’re offered at the beginning of the mortgage process may be very different than what’s available weeks later when you close on your loan. Locking your rate protects you against potential rising market rates.
How should you choose your lock period?
Most lenders offer 30-day lock periods or less, which are the most likely to be free. But others may offer free locks that are 45 days or more. Lock periods and fees are handled differently at each lender. However, chances are that the longer the lock period is, the higher the fee will be.
When choosing your lock period, allow plenty of time for the entire mortgage process.
Most closings can take 30 to 90 days. Consider your sales contract date, and ask your lender what their average closing time is for the loan program you’ve chosen. Then, err on the side of caution to be sure you have enough wiggle room if your closing were delayed a few days.What happens if the lock expires? If for some reason you don’t close on time and exceed your lock period, you may be able to get a lock extension, probably for a fee. But if not, you will instead pay whatever the market rate is at the time.
When should you lock?
I wish I could give you a clear-cut answer, but unfortunately, there’s really no perfect time to lock your rate. There’s always going to be some level of uncertainty involved.
Do you wait and hope the rate goes down? Or do you lock to protect yourself from a rising rate? Do you gamble and hope for the best? Or do you choose security and peace of mind? I understand that this decision needs careful consideration and varies depending on individual circ*mstances.
My main piece of advice is to work closely with your mortgage banker to find a solution that best suits you.
The earliest point you can lock is after you’ve been approved for a loan and have a property address. But it may be a good rule of thumb to wait to lock until after you’ve completed your home inspection and plan on proceeding with purchasing the home. But you can wait to lock any time until a few weeks prior to closing, which varies slightly lender to lender. When it comes to fees, longer lock periods are typically more costly. In addition, you probably have to pay extra to extend a lock period.
What happens if the rate drops after you've locked?
One other thing to consider is that while you’re protected from a higher rate after locking, you also won’t have the chance to benefit from a lower rate.If the rate were to drop to an enticing percentage, some lenders may allow a one-time “float down” during your lock period, which is where you could negotiate a lower rate. However, they’re typically expensive and rare. Before locking, ask your lender what options are available.
How do locks affect discount points?
On the day you lock your rate, you also lock the cost of any associated discount points. A discount point allows you to buy a lower interest rate by paying a percentage of your loan amount. Discount points lower your interest rate by a certain percentage.You might not be sure if discount points are right for you on the day of your lock.
The good news is that you can choose to pay discount points later, but the cost will be based on the day you lock your rate.
Just be sure to allow your lender plenty of notice if you plan to pay discount points, so that they have time to update the structure of your loan and review any additional paperwork they may need from you.
Locking your rate is a great opportunity for peace of mind. If you do choose to lock, get it in writing from your lender, and be sure to know how it works. A mortgage banker would be happy to help explain anything else you may need to know.
