May 26th, 2020 12:02 PM by Jackie A. Graves
A mortgage rate lock protects
a borrower from rising interest rates while a new mortgage or refinance is
being processed, which these days can take weeks to even months.
But the calculus for borrowers has changed during the pandemic.
Interest rates have plummeted and many experts believe they will either stay
low or go lower still in the coming months. Fannie Mae predicts that the
30-year fixed rate will plunge below 3 percent by 2021.
Locking in a rate now could mean
30 years of low interest rates on your home loan. However, some folks wonder if
there’s a chance to save even more money by letting the rate float during the
mortgage process or even waiting to take out a new mortgage or refinance your
It’s important to keep in mind that rate locks aren’t free.
Lenders build them into the cost of the mortgage. The longer the rate lock, the
higher the cost for the borrower and the lender.
“Paying for an extended rate lock might not be money well spent
given the uncertain time until closing and considering the weak economic
backdrop that is likely to keep a lid on rates,” says Greg McBride, Bankrate’s
chief financial analyst.
Mortgage rates have leveled out to around the mid 3-percent
range in the last few weeks, according to Bankrate’s weekly survey of
national lenders. The Fed’s massive buying spree of mortgage-backed securities
was key in stabilizing mortgage rates; which had, up to this time, been
seesawing dramatically since the COVID-19 pandemic hit.
A low, steady rate environment is good news for borrowers,
because it removes the pressure of racing the rate clock. Most experts think
rates are going to stay where they’re at for the time being — but some
think rates will drop even lower.
Recently, United Wholesale Mortgage unveiled a 2.5 percent
mortgage rate (for 30-year fixed-rate loans) for their independent lenders,
which has rate-watchers very excited. This kind of news can give some borrowers
pause when it comes time to locking in a mortgage rate, especially if they
think there’s a chance to save hundreds of dollars on their monthly mortgage
payments by waiting a few weeks.
“I’ve been personally telling people if they can stomach the
risk tolerance, go for a shorter lock period,” says Anthony Sherman, CEO of
Simplist. “Rates can change from day to day. We’ve had dozens of customers who
have done that.”
The downside of getting shorter rate locks or waiting is that
rates can shoot up without warning and stay aloft for weeks or months, which
translates into a more expensive loan for the borrower.
“What is most likely to undermine your rate lock is the length
of time it takes to get to closing. Waiting until you have better visibility on
how long it will take to get to close is a necessary prerequisite to locking
your rate,” says Bankrate’s McBride.
rate locks work
Mortgage rate locks allow borrowers to lock in the current
interest rate for a specific period of time. Generally, lenders offer 30- and
60-day rate locks as standard.
“If the lender does charge a fee you may be able to negotiate
with them to waive any rate-lock fees,” says Randall Yates, president at The
Shorter rate locks, such as seven-day locks can reduce the
borrowing costs by approximately an eighth of a point, says Sherman.
Conversely, longer rate locks, which are generally between 60
and 90 days, come with fees which are usually baked into the interest rate.
These fees vary by lender.
Lenders charge for longer rate locks because their risk
increases over time. If rates rise, then the lender will miss out on the
difference. Quicken, for example, offers a 90-day rate lock product called
RateShield which costs one quarter of a percentage point. This means if you
qualify for a 3.25 percent interest rate, it will rise to 3.50 percent under
The benefit of a rate lock is that borrowers are protected from
rising interest rates during the lock period. The downside is that borrowers
won’t get the advantage of falling rates during that period.
Floating rate locks are options for borrowers who want to lock
in the current rate with the benefit of getting a lower interest rate if they
fall. Lenders charge around 1 percent of the total loan amount for a floating
rate lock. So, if your loan is $275,000, you would pay $2,750 for the floating
“Be sure to weigh the advantages and disadvantages of a
floating-rate provision, which can be expensive. And, depending on the
borrower’s circumstances, it may not make sense to include in the rate lock,”
says Leslie Tayne, founder of Tayne Law Group in Long Island, N.Y.
The floating rate lock can be a costly gamble or it can help you
hedge your bets if rates do fall. Borrowers who plan to stay in the home
long-term have more to gain from a floating rate lock that translates into a
In most cases, the 30- to 60-day rate lock should be sufficient,
especially if you qualify for a rate in the mid to low 3s or even 2s (if that
comes to pass).
consider extending your rate lock
However, there are some instances where homebuyers might need to
extend their lock. Louise Rocco, a real estate agent at Exit Bayshore Realty in
Tampa, rattles off a laundry list of common homebuying scenarios that might
necessitate a rate-lock extension.
“The appraisal might come in too low, so you’ll have to appeal
it and extend the lock,” Rocco says. “Let’s say you have a double closing,
where you’re trying to sell and buy. If something doesn’t happen, the people
who are buying your house can’t sell their house, for example, you will have to
push off the closing date, so you’ll need to get a rate-lock extension.”
Rate locks are important because interest rates affect the cost
of your loan. If the rate rises, you could end up getting priced out because
the loan then becomes more expensive than what you’re qualified to borrow.
“A half a percentage point, depending on the loan amount, could
mean an extra $100 per month in mortgage payments. You could end up losing the
loan because your DTI won’t allow for that higher monthly payment,” Rocco says.
Be sure to communicate with your lender throughout the process.
If you’re getting close to the end of your lock and the house closing is
far off, talk to your lender about options for extending your lock.
Finally, get everything in writing, Tayne says. It’s important
to have documentation of the terms of your rate lock so there are no surprises
when it’s time to close.
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