After going through the application process and being approved for a mortgage and comparing interest rates offered by various lenders, you have finally found a mortgage with terms that fit your budget. As you proceed through the closing process, you are concerned that the interest rate initially offered on your loan will increase, leaving you to pay higher costs to own your home. In cases such as these, you’ll want to preserve the mortgage rates offered in case you decide that the terms are the one you’d like to close on, which can be done through a rate lock on the mortgage.
What is a Rate Lock?
A rate lock is a guarantee that the interest rate offered in a loan estimate will not change for a certain period, generally anywhere between 10 and 60 days. This ensures that from estimate to closing, the interest rate does not increase on the loan regardless of fluctuations in the market. If you close on the loan within the specified time frame and there are no changes to your application, the interest rate will remain constant through the closing process. Some lenders will automatically lock the interest rate when they provide the loan estimate, which will be clearly stated on the first page of the loan estimate and include how long the rate will be locked in.
Do Rate Locks Come With a Cost?
With typical 15 to 30 year mortgages, lenders often offer a free rate lock for 30 to 45 days. Depending on the lender’s policies, they may even give up to 60 days to lock in an interest rate. However, if the lender does not offer a free short-term rate lock, the cost can vary widely depending on the lender. Borrowers should be careful that they can complete their entire application and provide the lender with any additional requested information within the rate lock period so they can avoid the rate lock expiring or being charged additional fees to extend. In some cases, mortgage lenders may charge up to 1% of the total loan cost in rate lock extension fees which can be several thousand.
If the rate lock period had expired to no fault of the borrower, lenders might be willing to negotiate extensions. For example, if the lender was unable to complete the closing process in time, an appraisal took too long, or there is some other extenuating circumstance not caused by the borrower, many lenders will be willing to extend the rate lock at no additional cost.
In other circumstances, such as if the seller has been delayed from moving out of the property, homebuyers can negotiate to have the seller cover any rate lock extension fees as a component of the sales document.
Factors That Affect a Rate Lock
Unless there is a change in the application, the rate lock will remain valid for the duration of the specified period. Even though you have locked in the interest rate, the following scenarios can increase interest rates: you are requesting a different loan type or amount, you have changed the amount you are willing to put into the down payment, the home’s appraisal was higher or lower than expected, your credit score changed, or the lender was not able to document all sources of income like overtime or bonuses.
What Happens if Interest Rates Drop?
While rate locks are intended to protect a borrower from increases in interest rates due to market volatility, rate locks may prevent borrowers from benefiting from interest rates that decrease. Small dips in interest rates should not worry borrowers, as their rate was locked in at an amount they felt comfortable spending. However, if you are worried that interest rates may fall significantly, you can ask the lender if they would include a “float down” provision in the locked rate. With float down provisions, the rate is locked at the agreed amount but if interest rates drop you have the option to close at the lower rate. If interest rates rise, your locked-in rate will be unaffected. Often, adding a float down provision can add additional costs to the loan, so borrowers should carefully consider if potentially getting a rate lower than what they are locked in for is worth it.
Because rate locks are only valid for a certain number of days, homebuyers should be sure they are in a good position to apply for a mortgage. Borrowers should know if they have good enough credit to prequalify for a loan, they have all necessary documentation prepared for the application process, and that they have looked at houses within their budget. Borrowers will want to lock in a rate as soon as they have found one that fits their needs and have determined that they are ready to proceed with the home buying process.
