When to lock in your mortgage rate
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Whether you optimistically hope that mortgage rates will decline or are resigned that rates will stay elevated above the historic lows of 2021, you may be wondering when it makes sense to sign an agreement with your lender that locks in a specific rate.
We asked two experts for advice: Eric Johnson, a branch manager and mortgage originator in Green Bay, Wis., with Inlanta Mortgage, which is based in Pewaukee, Wis.; and T.J. Williams, a regional vice president and real estate consultant in New York City with Wealth Enhancement Group, a registered investment adviser. Both responded via email, and their responses were edited.
How does a typical rate lock work?
Williams: Mortgage rate locks allow borrowers to lock in a specified interest rate for a stated period after the purchase agreement is signed to buy a home. This helps the borrower in that the expected cost of ownership of the home will not change based on a possible increase in interest rates between the time that they made the offer or locked in the rate and the time when they close on the home. Often, the buyer can lock in the rate any time after they are approved and sign the purchase agreement up to five to 10 days before closing.
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There are two basic types of rate locks. The first is often a built-in 30- or 60-day rate lock. During this time, the application is processed, income is verified, inspections are completed and the lender, the seller and the borrower work together to get to the closing on the home. The buyer can often choose when during this process to lock in the rate. The second is an “extended rate lock.” This is an additional extended lock for a varying period (usually an additional 30 to 60 days but can be extended up to almost a year for new construction) and used when the borrower believes the initial 30 to 60 days may not be enough time to successfully close on the home.
What are typical costs to lock in a rate for different periods?
Johnson: Most loan programs don’t require an upfront cost for locking in a rate. When locking in a rate, borrowers are made aware that the lock confirms their interest rate which has been agreed to by both lender and borrower. Longer lock periods, such as six-month locks, are more likely to require an upfront fee from the borrower that is forfeited if the borrower doesn’t close with the lender that provided the rate lock. Generally, the difference in interest rate between a 30-day lock and a 75-day lock would be a 0.125 percent higher interest rate for the longer lock period.
Williams: For lenders who do not offer an initial 30- to 60-day rate lock, they may offer a lower rate at first and then charge between 0.25 percent to 0.50 percent of the loan amount for that specified period rate lock. Typically, the more volatility in the interest rate market, the higher the cost.
The difference in how and when the costs are assessed for an extended rate lock, and how much the cost may be, can vary widely from lender to lender and program to program. For instance, one lender may assess between 0.05 percent to 0.375 percent of the loan amount to lock in a rate upfront.
Why should buyers consider locking in their rate?
Johnson: Borrowers should consider locking in their mortgage rate as soon as their purchase offer is accepted. I always recommend a borrower work with a licensed professional to advise them of all available options and when the best time to lock a rate would be.
Williams: A buyer must determine if the cost of a rate lock or extended rate lock is truly worth the investment by calculating the cost of a loan without a rate lock and comparing the additional increase in rate and cost of extending the rate.
If the borrower cannot afford to risk the rate being higher, and they believe there is a possibility in delays in closing, there may be a reason to investigate an extended rate lock — especially if the buyer is purchasing at the top of their budget.
When should buyers consider a longer rate lock?
Johnson: Borrowers should consider a longer-term rate lock when in a rising interest rate environment, such as the one we are experiencing right now.
Williams: Typically, if a buyer is buying new construction where the time to close may be months rather than weeks, or in the event the buyer has reason to believe there may be extended delays in closing, they should consider a longer rate lock. In times when interest rate increases are apparent and sometimes dramatic, the longer time between offer and closing may warrant a longer rate lock.
What happens if a buyer doesn’t lock their rate? Could they lose the loan approval?
Johnson: Not locking in a rate can be a risk in situations where a borrower’s purchase and loan request are near or at the maximum of what they are qualified to buy and borrow and could jeopardize their ability to qualify for the loan. If the interest rate increases, it would push the borrower’s monthly payment higher and could prevent loan approval if other adjustments can’t be made. Borrowers should work closely with a licensed mortgage originator to go over their full financial circumstances and to ensure the loan is set up to help the borrower meet their financial goals.
Williams: During the mortgage application process and underwriting, if interest rates increase to a point where the lender believes the loan is no longer affordable to the buyer and the rate was not locked, it is possible — and likely — that the lender may rescind approval of the mortgage.
A buyer and the lender should have an open dialogue to know at what rate the buyer may no longer be able to afford the home. A more critical step is knowing not only what you, as a buyer, are approved for, but more importantly, what you can actually afford and be financially healthy.
What happens if rates go down during a rate lock?
Johnson: A rate lock is a commitment from the lender to make a loan at the rate quoted to the borrower. It is also a commitment from the borrower to accept and close at the agreed upon rate. The borrower is protected if interest rates increase after locking. Unless the borrower has purchased a “float down” option, the interest rate can’t be reduced if rates go down before closing. The term “lock in” confirms that the rate has been agreed to by all parties.
Williams: The availability of a “Float Down Option” varies between lenders and programs, and costs are often between an additional 0.5 percent and 1 percent of the loan amount.