Understanding Mortgage Rate Locks

A rate lock is a guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific period of time. A rate lock protects the borrower from rising interest rates: So, if the borrower locks in a rate of 4%, s/he will only have to pay 4% interest even if rates rise while s/he’s going through the loan application process and before closing on the home.

Here’s what you need to know about rate locks:

1. What happens if the rate goes up or down after you lock in the rate?

If interest rates rise during your lock-in period, you will not be impacted — you will still pay the lower rate that you locked in. If, however, you lock in a rate but then rates drop, you typically will not be able to take advantage of those lower rates; instead, you’ll pay the higher rate that you locked in. There are some exceptions to this: First, if you have a so-called “float down” provision — which states that if rates drop during the rate lock period, the borrower can take advantage of the lower rates — in your written rate lock agreement, you should be able to get a loan with the lower interest rate. (But beware — putting this provision in your agreement can be costly, so you need to think about how big of a risk falling interest rates might be to you). Second, you can rewrite your rate lock so that it reflects the new, lower rate, but this, too, can prove costly.

2. When should you lock in your rate?

For most people, it makes sense to first sign a purchase agreement on a specific property before attempting to lock in a mortgage rate. Then, find a mortgage loan with a good interest rate and consider asking your lender to lock in the rate. But before you formalize the rate lock, consider these things: First, does your lender offer free rate locks for the time it takes them to process the loan, typically 30 – 45 days… if this is the case a rate lock may not be necessary.

You want to be sure you don’t lock in the rate too early as rate locks are usually only good for between 45 – 90 days, so if your loan doesn’t process within that period, your rate lock offer will no longer be good. If the lender does not offer free rate locks during the processing period, ask the lender to share their average loan processing time and try to get them to lock-in your rate for as long as possible to protect yourself.

3. Should you choose a longer rate lock period?

All things being equal, consumers should choose a longer rate lock period to ensure they can get the agreed upon rate even if there are delays. But there’s a catch: lenders typically lock in interest rates above the current market rate, often by an eighth to a quarter of a percentage point, depending on the lender and duration of the lock. Longer-term rate locks typically cost more. Thus if you pick a rate lock with a longer duration (say 120 days) the interest rate will be higher, or the lender may charge a fee for this longer duration.

Normally if a loan fails to close within its lock period, the borrower will be charged the “worst case scenario” price for a re-lock (the worst price between the original lock and the current interest rate). Typically the lender will keep an eye on the rate lock period and issue a “rate lock extension” before the lock actually expires.  Doing so will ensure you get to keep the rate you originally signed up for. However, rate lock extensions don’t come for free either.  If it wasn’t the lender’s fault, the cost of the rate lock extension could run you several hundred dollars or more, depending on the associated loan amount. Ask your lender to spell out the differences in cost and rates for different duration periods.

4. Does it cost money to lock in your rate?

Sometimes rate locks cost money and sometimes they don’t. The rate lock fee may be a flat fee, a percentage of the total mortgage amount or added into the interest rate you lock in. The fees may be refundable or non-refundable. Typically, short-term rate locks (those less than 60 days) are free or cost roughly 0.25 – 0.50 percent of the total loan, or a few hundred dollars. Lenders typically charge more for longer-term rate locks. Borrowers who decide not to go ahead with a home purchase and cancel the mortgage application likely will lose that deposit. Lenders that don’t require a deposit often charge a cancellation fee that can cost borrowers about the same amount.

Longer rate locks could make sense for buyers who are in the process of building a new home and don’t want to run the risk of incurring higher rates. They can also help borrowers trying to buy a foreclosed home, which can take several months.

5. Get the Mortgage Lock in Writing.

it’s important to stay on top of your mortgage rate lock, and to make sure you have the rate and terms in writing. Never just assume a mortgage broker or bank has locked your interest rate.

They may say your rate is this or that, or that it’s locked, but in actuality they may be floating your rate in the hopes of getting a better commission or yield spread premium.

To decide whether the costs are worth it, borrowers should first consider what would happen if they didn’t lock in their rate.

For some home buyers, rising rates could mean they would only be able to borrow a smaller sum, which could derail the home purchase.

Borrowers who are considering locking in an interest rate should start by speaking with their real estate agent and/or their lender. Home buyers who are looking at different lenders should compare the various charges and penalties.

What we often recommend as an option is to avoid rate locks and, if interest rates rise, consider paying points (a fee to secure a lower interest rate). Borrowers who pay 1% of the mortgage amount—known as a point—can lower their interest rate by as much as a quarter of a percentage point.

The strategy can lead to greater savings than a rate lock if the borrower holds the loan for a long period.

If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!

The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickeringto, 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235

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