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Shopping around for a mortgage? If you’re worried about rising interest rates and unpredictable market changes, you may consider a mortgage rate lock. Comparing options is always wise when you’re looking to invest in what will likely be the largest purchase you ever make. Get prepared to make a decision by learning more about mortgage rate locks and determining which questions to ask potential lenders before you sign on the bottom line.
What Is A Mortgage Rate Lock?
A mortgage rate lock is an agreement between a borrower and lender to secure a specific interest rate for a set number of days between the issuance of the mortgage approval and the closing of the mortgage loan. It can help prevent buyers from becoming victims of uncontrollable market circumstances that could result in rapidly increasing interest rates prior to closing.
When Should You Lock A Mortgage Rate?
Since many borrowers have a fear of rising mortgage rates, they’ll rush to lock in a rate as soon as they can in the hopes of making the home buying process a bit more attainable for them. Lower interest rates can definitely save borrowers money but locking in a rate always comes at a cost. Be sure to inquire about mortgage lock deposits or additional fees/higher rates you may encounter as a tradeoff for the convenience of locking in a rate.
If you fail to close the loan by the end of the lock period, your guaranteed rate will expire and any deposit you made to your lender at the start may be lost to the lender. For these reasons it’s always wise to do your homework, ask the proper questions and ensure you have a plan in place before rushing to lock in a lower mortgage rate.
Benefits Of Locking Your Mortgage Rate
Mortgage rates can fluctuate on a regular basis, even daily, and can be influenced by many different market conditions. They have a big impact on the monthly payments of borrowers, so if they change rapidly or unexpectedly, it could have a negative impact on your ability to make payments on time or buy the home you really want. Even a difference in interest rates as small as 1% can translate to saving a few hundred dollars each month, thousands each year and tens of thousands over the life of your loan.
Risks Of Taking On A Mortgage Rate Lock
One of the main downsides of locking in a mortgage rate is the fact that if rates go down during your lock period, you’re not able to take advantage of them as you’ve previously locked in at a specific rate for a certain duration of time.
As a borrower, you’ll also need to keep in mind that locking in a lower mortgage rate always comes at a cost. In exchange for the convenience, some lenders will charge a mortgage rate lock deposit to keep the rate locked in for a certain period of time. Typically, the longer the lock period, the larger the required deposit. The lock deposit is credited back to the borrower when the mortgage funds, so if the borrower walks away from the mortgage and lock agreement, they lose their lock deposit entirely. The charge for a rate lock deposit could range from 0.25% – 0.5% of the amount of your mortgage. If you want to learn more about mortgage lock deposits, you can calculate it on your own using this simple formula:
Mortgage Rate Lock Deposit = Mortgage Amount x Deposit %
In exchange for a locked in mortgage rate, some lenders may also have an interest rate that’s slightly higher than the rate when borrowers choose to lock in. Since rising interest rates can make lenders more money, they often include what’s called a “cap” within the agreement borrowers are required to sign. This means that if interest rates rise before the loan is settled, the cap they’ve included allows them to raise yours as well. It’s important to note though, that you will still have some protection from rising interest rates as the cap always sets a limit on the amount a rate can rise during a mortgage lock.
When it comes to locking in a mortgage rate, you’ll likely have a lot of questions to ask before you determine if it’s the right fit for you. These are some frequently asked questions that may help you learn more about how mortgage rate locks work and when you should consider them:
How do I lock a mortgage rate?
If you’re interested in locking in a mortgage rate, you’ll need to speak with your lender to determine how the process works and what fees/steps will be required as part of the process. When you receive a mortgage loan offer, your lender will typically ask if you want to lock in at that rate, so if you do, the conversation can start there.
Does my loan type affect the mortgage rate lock?
Different types of mortgages may affect the specifics around your mortgage rate lock, including whether they’re eligible for a lock and if the lock can be extended. Although your loan type can impact aspects of your mortgage, deciding when to lock in your interest rate is part of the mortgage process regardless of the loan product you choose. The specific lock period your lender offers you will vary based on your loan type, where you live, the loan terms and the mortgage lender you choose.
How long is a mortgage rate lock good for?
Most rate locks have a lock period of 15 – 60 days. If it expires before your loan closes, you may have the option to extend the lock period by paying a fee.
What happens if my mortgage rate lock expires before closing?
If it turns out that your interest rate lock expires before you close, you’ll have two options at that point: close with the current mortgage rate available or pay for a rate lock extension. If you’re worried about paying rate lock extension fees, be sure to speak with your lender to determine what they recommend based on your current position.
If you’re comparing rates for a mortgage and want to learn more about your options, a mortgage rate lock will likely be on your radar. As with any financial decision, it’s always wise to compare your choices before determining if locking into a mortgage rate with your lender is best suited for you. Whether you’ve owned a few homes in your lifetime or are a first-time home buyer, there’s always value in speaking with a professional about your options. Get in touch with our team to learn more about mortgage rate locks, current interest rates and how you can purchase the home of your dreams sooner than you think.