If you’re planning to apply for a home loan, it’s likely that you are aware of the fact that mortgage interest rates fluctuate daily. Depending upon market conditions, fluctuations can even happen on an hourly basis. These changes can have an impact on your finances when interest rates spike. To help avoid paying more for your mortgage, you can take advantage of a mortgage rate lock.
A mortgage rate lock is a financial tool that is provided by lenders to help control the fluctuation of mortgage interest rates during the processing of your loan. Rate locks are generally available between 30 and 60 days, but can sometimes be extended a little bit longer.
8 Common Questions About Mortgage Rate Locks
Check out these eight frequently asked questions to understand how the mortgage rate lock concept works in detail.
1. What is a Mortgage Rate Lock?
A ‘rate lock’ allows the borrower to freeze (i.e. lock in) the interest rate on a mortgage for a specified time period at the then current interest rate. It is a tool that helps curb potential interest rate increases. In other words, if you ‘lock’ your rate at 4.5% for 60 days and rates increase to 4.75% during this time, your rate remains 4.5% despite the increase. This tool takes the guesswork out and allows the borrower to plan and budget without the risk of the market adjusting during the time the loan is being processed. If you don’t take advantage of locking in an interest rate, your rate may fluctuate until closing and might leave you open to an increase in rates and an increase in mortgage payment amounts.
2. When Should You Lock a Mortgage Rate?
For many borrowers looking to purchase a new home, locking in a rate is typically done after the initial loan approval. If you lick in too early, you might limit your opportunity for a better rate before the sale is complete, or you might have to pay additional to extend the lock once it expires. For those looking to build a new home, there can be a considerable time frame between choosing your perfect home site and the actual completion. A loan originator with experience in new home construction lending will take the time to explain to you the options available for locking in your interest rate. Once you are comfortable with the rates and terms being offered, you may want to consider checking with your builder to ensure your lock period is sufficient time to complete your home before committing to the extended lock.
3. How Long Can You Lock in a Mortgage Rate?
The most common timeframe for rate lock is 60 days. An extended lock by definition is greater than 90 days but a longer rate lock can often times be more expensive. Whether you are buying a resale home or are building a new home, it's important to work closely with your loan originator to find the best rate lock term for your situation.
4. How Do You Lock in a Mortgage Rate?
Confer with your loan originator on their specific policy requirements as different lenders may have different policies. Most mortgage lenders offer you an option to lock in your mortgage rate after the loan application has been pre-approved. Typically, once you agree to the rate and term, you will be asked to send a written confirmation that you would like to lock in a rate. Then, the loan originator will send you a confirmation of the lock and terms officially.
Sorting through the choices to find the best loan for you can be daunting. Our Shea Mortgage™ team can provide you with basic understanding of loan options available and help you choose the loan that best fits your needs.
5. How Does a Mortgage Rate Lock Work?
Rates are subject to change hourly or daily, and are driven by market conditions. Once you agree to lock in your interest rate and you close in the designated time frame, your rate should not change. That may mean that if rates go down, you would not be entitled to a rate reduction of your lock either and similarly, if the rates go up, you should be protected. There are some changes that would affect a lock-in. For instance, if you change loan programs, that would likely change the interest rate lock-in and it would make the lock obsolete. Sometimes, a change in the loan amount would affect the lock-in and there are times that a change in qualifying, such as higher debts than originally disclosed, could affect the lock-in. Just be sure to talk these things through with your mortgage lender as they will be able to review this in more detail.
6. What is a Mortgage Rate ‘Float Down’?
Some mortgage products have “float down” features on an extended lock product. A float down could be available if the rates have lowered since your original long-term lock-in began. With some programs, you would be able to take advantage of the lower rates. However, you can only exercise this option once. Each lender may have different requirements or minimums, so you must review this to see if your long-term lock has a float down option. It will be designated clearly on your lock in form.
7. How Much Does a Rate Lock Cost?
The cost to lock in varies on the length of the lock. Your loan originator will give you additional information if you choose a lock that extends past 60 days.
8. What Happens if my Rate Lock Expires?
If you are not able to close within the time allotted in your long-term lock agreement, your lock will expire. Many companies will relock you at the higher end of the market rate or your original lock. You should discuss what the consequences are if your rate lock expires with your loan originator before you lock in. Lenders may charge a fee for extending the term of the rate. Be sure to ask about mortgage rate extension fees.
Pros and Cons of Locking Your Mortgage Rate
The advantages of rate lock are clear. Mortgage interest rates may increase. Locking a loan is much like buying insurance. It is protection in increasing or changing market conditions. However, you may also encounter problems if you lock your rate at the wrong time. Here's a look at the pros and cons of locking your mortgage rate.
- Protection against rising interest rates
- Peace of mind
- Interest rates may fall after you lock in
- You may feel pressured to buy a house
THE COMMON TERMINOLOGIES YOU SHOULD KNOW ABOUT MORTGAGE RATE LOCKS
Rate lock: Maintaining the same interest rate and terms from the time the loan is locked in, to the time of closing.
Float down: Adjusting the interest rate downward to the current market rate, if the current rate is less than your locked rate.
Points: Points are calculated as a percentage of the loan amount. Each point is 1% of your loan amount. Points can be charged as an origination point or a discount point, which is typically paid to buy down the interest rate to a lower rate. Points are typically paid at loan closing and can be referred to as part of your closing costs.
THE DIFFERENT TYPES OF MORTGAGES
Fixed mortgage: Mortgage products with a constant rate of repayment for the term of the loan.
Adjustable-rate mortgage: Home loans with a rate that changes depending upon the term of the loan. For example, 1 Year ARM could adjust annually based upon current market rates and indexes.
Government-insured loans: A mortgage loan guaranteed by the federal government.
Conforming/conventional loans: A mortgage loan meeting specific criteria and loan amounts which conform to the government-sponsored entities: Fannie Mae and Freddie Mac.
Jumbo loans: A mortgage loan exceeding the conforming loan limits set annually by Fannie Mae and Freddie Mac and offered typically with different underwriting guidelines.
Pre-approval letter: A document estimating the amount of loan you may qualify to borrow. It’s given by a mortgage company or bank before one applies for a mortgage loan.
Listings: Real estate properties for sale.
Inspection: Assessing the state of a property.
Appraisal: Estimated value of a given property calculated by a licensed professional.
Loan Contingencies: Specific loan conditions set out in the original underwriting approval that must be fulfilled prior to funding.
Now that you know the different types of mortgage interest rates, it can also be important to know what happens to house prices when interest rates rise and how they can affect mortgage prices, as you will want to have a pulse on the housing market before moving forward with a rate lock.
A mortgage rate lock can protect you against paying more money for your mortgage. If you’re looking for more actionable tips on the mortgage process and how to take advantage of rate lock, consider talking to the experienced mortgage professionals at Shea Mortgage™. They can guide you every step of the way from initial application until the closing and everything in between, including rate locks. Contact us to learn more about mortgage financing.