Mortgage rate locks: 5 questions to ask
Ask before you lock
- Will I have time to close before the lock expires?
- How much will a rate lock cost?
- What happens if the rate lock expires?
- How can I get out of the rate lock?
- Have I compared lenders?
As a homebuyer, you’ve gone through the arduous process of viewing properties, making a purchase offer and completing your mortgage application. You are approved for a low interest rate and go to sleep happy. The next day, however, interest rates have jumped half a percentage point and you’re suddenly looking at a significantly more expensive home loan. Now, your lender may require that you make a larger down payment or worse yet, determine that you no longer qualify for the costlier loan.
Homebuyers can avoid this scenario by using a mortgage rate lock.
How a mortgage rate lock works
With a rate lock, your lender guarantees an exact interest rate – for a fee – provided that your loan closes within a specified period of time and there are no changes to your credit score, the appraised home value or other application factors. Rate locks are usually offered once the home seller accepts your purchase offer and your mortgage application is approved. Sometimes rate locks are included as part of the loan estimate.
When you lock a rate, you have assurances that if interest rates go up, you don’t pay more than the predetermined rate and its fee. If rates go down, however, you end up paying more. To understand the risks, ask your lender these five questions before locking your rate.
1. Will I have time to close before the lock expires?
A rate lock only applies if your loan closes within the lock period. Rate lock periods are generally between 10 and 90 days, so it is important to assess the local housing market and talk with your lender to determine how long it will take for your loan to close. You can lock in a rate as part of your loan application or lock it in at the point of approval, but remember to allow for plenty of time for your loan to close within the lock period.
2. How much will a rate lock cost?
The cost of a rate lock depends on the size of the mortgage, its term and the length of the rate lock period. Typically, the longer the rate lock the more expensive the fees. Rate locks of 10 to 15 days may only amount to a fee of a few hundred dollars, whereas a lock period of 60 to 90 days can cost thousands, depending on the conditions of your loan.
Fees vary significantly by lender. The cost of the lock can be calculated in different ways, including as a one-time fee, a percentage of your loan amount or part of the interest rate. Understand that a “free” rate lock likely means the cost is included in the interest rate itself.
Rate locks are not set in stone. You can exit, extend or renegotiate your rate lock, though these actions all carry associated fees. Note that those fees may cancel out any savings you’re seeking.
3. What happens if the rate lock expires?
Identify what recourse you have should the rate lock expire before your loan closes. Typically, lenders allow you to extend the lock period for a fee. Alternatively, you will be charged the higher of either the lock rate or the current interest rate at the point of expiration — also at a fee. Thus, it is imperative that your loan has plenty of time to close before the lock expires to avoid penalties.
4. How can I get out of the rate lock?
The primary risk of a mortgage rate lock is if interest rates fall by the time your mortgage closes. One way to offset this risk is by including a written float-down option in the rate lock agreement. A float down gives you a one-time option to adjust your interest rate should rates decrease after you locked in. It is not automatic and you must inform your lender of your intention to apply the float down. As you may have guessed, including such protection in your rate lock will cost a fee.
If interest rates fall and you do not have the protection of a float-down clause, you can negotiate with your lender for a new, lower interest rate. The lender likely will charge a cancellation fee. Assess whether that fee is worth the money saved with a lower rate over the life of your mortgage.
5. Have I compared lenders?
A rate lock should not be considered a way to play interest rates, but rather a means to securing your budget after you’ve decided on the best mortgage for you. It is more important to shop around and be comfortable with your lender and loan conditions as opposed to trying to predict interest rate changes. Approach a rate lock with careful consideration and it can be a useful tool to help you secure a cost-effective home loan.