August 5th, 2018 10:46 AM by Jackie A. Graves, President
to find the lowest possible interest rate on their mortgage. Once they do, the
last thing they want is for that rate to rise before the loan is finalized.
interest rates can fluctuate daily, consumers can use rate locks to protect
themselves from increases while they wait to close on their loan.
essential questions and answers to help you understand how a rate lock works.
What is a rate lock?
rate lock guarantees that the lender will honor a specific interest rate at a
specific cost for a set period. The benefit of a mortgage rate lock is that it
protects the borrower from market fluctuations.
example, if your lender locks in your rate at 4.9 percent for 45 days and rates
jump up to 5.1 percent within that period, you’ll still get your loan at the
interest can change every day and sometimes even multiple times a day, so we
always recommend that borrowers lock in their rate,” says Richard Greene,
branch manager and loan officer at New Mexico Mortgage Company in Albuquerque.
up to the customer whether they get a rate lock. If they choose not to lock in
their rate, this is known as “floating” a rate. That’s not a bad strategy when
interest rates are generally falling, but it could be costly in a rising-rate
When can a rate be locked?
depends on the lender, but some lenders will lock in a rate once the borrower
is pre-approved with just an address of a prospective home while others might
wait for the seller to accept the offer.
you lock too early, however, you might end up exceeding the expiration date and
facing extension fees or whatever rate is then prevailing. Keep in mind
that the lender can void a rate lock if certain items on your credit report or
mortgage application change between the time of your agreement and final
Pro Tip: Look for the sweet spot when
pricing out a rate lock.
The sweet spot is the combination of
interest rate, term and cost you need to achieve that optimum deal. Most
lenders won’t lock you for less than 30 days unless you’re ready to close and
often offer the same rate for a 15- and 45-day period. Ask about the rate for
several lock periods: 15, 21, 30, 45 or 60 days. Anything longer than 60 days
gets pricey, so it might be smarter to wait until you get nearer to the closing
and check again.
How long can a rate be floated?
can float their loans until the day of final underwriting and the float is
typically 30 to 60 days, but it might be longer — if you’re willing to pay more
in fees to get it.
How much does a rate lock cost?
locks aren’t free, but that doesn’t mean you’ll see a line item charge for
them. Most lenders do not charge a separate fee for rate locks within a certain
period of time. The cost of a rate lock is baked into the rate you’re offered.
are usually charged by the lender when the rate lock expires and the borrower
wants to extend the lock period.
Tip: Pay points for a lower rate
discount points (one point equals 1 percent of the loan amount) might be worth
it to get a lower rate. Divide the estimated monthly savings into the cost to
find how many months you need to own the home to recoup the expense. Compare
the interest rates quoted at different prices, and you might be surprised to
find that higher discount points, combined with a lower rate, could cost
less over the years you expect to be in the home.
What happens if the rate lock expires before closing?
lender might offer to extend the rate lock, either free or for a fee. If they
won’t extend, that combination of rate and points might no longer be available
and the loan would be based on the new prevailing terms. Fees vary depending on
an extension costs .375 percent of the loan amount. If the loan is $100,000
then a 15-day extension would cost $375. And then you can extend again. If the
rates have gone up it might be cheaper to pay the extension fee upfront,” says
out when your loan is expected to close and work backward to determine when to
lock the rate. If you think you need 45 days to close your loan, find out what
the interest rate would be if you locked it for a 60-day period.
How long can a rate be locked?
a lender will lock an interest rate between 30 and 60 days with no fee.
that, the borrower might have to pay a fee to extend the rate lock. The
extension can be for 90 days to as many as eight months, depending on the
people who are doing construction loans, for instance, paying for an 8-month
rate lock might save them money in the long run if interest rates do rise.
are hedging that the market will go up at a certain rate, that upfront,
non-refundable cost will cover that difference, if you will,” says Greene.
Tip: Calculate the timing
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