Mortgage Rate Lock: What It Is and When You Should Use It

Key Points

• A mortgage rate lock does just that: it prevents the mortgage rate from changing for a set period.

• Mortgage rates change frequently. A rate lock helps protect you from these fluctuations, so you won't pay more if current market rates rise before you close your loan.

• Depending on the lender, you can lock in your rate for anywhere between 30 and 120 days.

• Some lenders offer rate locks for free, while others charge a fee. Others charge a fee only when they extend the mortgage rate lock period.

If you're shopping for a mortgage, you've already encountered a reality about interest rates: What you see today could be gone tomorrow. A mortgage rate lock ensures your mortgage rate stays the same from initial listing to closing. However, locking in your rate is not a binding agreement to work with that lender. You can still change lenders if you want. Here's what you need to know about rate lock.

What is a mortgage rate lock?

A rate lock guarantees that a mortgage lender will honour a specified interest rate at a fixed price for a specified period.

The benefit of a mortgage rate lock is that it protects you from market fluctuations in interest rates. For example, if your lender sets your rate at 6.68% for 45 days and the rate increases to 7% within that period, you will still get your loan at a lower rate.

"Mortgage interest [rates] can change daily and sometimes several times aday, so we always recommend that borrowers lock in their rates."

- Richard Greene

Branch Manager and Loan Officer, New Mexico Mortgage Company

Finding the rate lock is up to you. If you choose not to and don't have a fixed rate, it's known as a "floating" rate. This is a good strategy: When interest rates generally fall, it pays to take advantage of this favourable movement in the market. (The float is usually 30 to 60 days, but it can be longer if you pay a higher fee to get it.)

Why do mortgage rates fluctuate?

Many factors cause mortgage rates to fluctuate, including the current state of the economy, housing demand, financial markets, and actions taken by the Federal Reserve. Here's how some of these can affect rates.

• Mortgage Demand: When there is strong demand for housing, rates rise. If demand slows down, rates drop to attract more home buyers.

• Economic changes: Rates also rise when the economy is doing well and fall during recessions to encourage growth. Mortgage rates may also react to volatility, such as regional bank failures in early 2023.

• Federal Reserve: The U.S. central bank does not directly set fixed mortgage lending rates, but when the Federal Reserve raises its key interest rate, the mortgage market responds accordingly. Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are particularly affected.

• Treasury bond yields: The 10-year Treasury, in particular, reports movements in mortgage rates and yields on mortgage-backed securities, which are packaged portfolios of hundreds of fixed-rate mortgages.

When can you lock in a mortgage rate?

This depends on the mortgage lender. Some lenders offer a mortgage rate lock once the borrower is pre-approved with a prospective home address. Others may wait for the seller to accept the buyer's offer.

However, if you lock it too soon, you may face an expiration date and an extension fee or new fee. If you are starting to look at properties, it may not be wise to go for a fixed rate right now. You'll want to avoid feeling rushed to find a place and close the loan.

Also, remember that a lender can void a rate lock if certain items on your credit report or mortgage application change between your agreement and final underwriting.

The sweet spot is the optimal combination of interest rate, term and costs. Most lenders will lock your rate for less than 30 days once you're ready to close, and they often offer the same rate for periods of 15 and 45 days. Ask about rates for different lock-in periods: 30, 45, 60 or 120 days. Anything over 60 days is expensive, so it's wise to wait until closer to closing and check again.

How long can the rate be blocked?

While 30- and 60-day fixed rates are standard, you can find a broader range of options. It all depends on what the mortgage lender offers.

Of course, you may have to pay a higher fee for a more extended block. In some cases, this may be an easily justified cost. For construction borrowers, for example, paying an eight-month fixed rate can save them money in the long run, with significantly higher interest rates.

Mortgage Rate Lock Extensions

If you are nearing the end of your mortgage rate lock period and need more time to close on your home, you can pay for a rate lock extension. The fee is usually a percentage of your loan amount. The longer the extension, the more you'll pay. It's usually more efficient to prepay for a more extended rate lock and have a cushion in case you need more time.

How to determine a mortgage rate.

You can lock in your mortgage rate once your lender has done an initial review of your finances. Your lender will likely require some or all of the following documents in advance.

• Credit Report

• Social Security Number Verification (a form you sign)

• Last two months of bank statement.

• Last two months of investment account statements.

• Tax returns for the last one or two years.

• The last year or two of tax forms such as W-2, 1099, etc.

• Payment receipts from the last 30 days

• Proof of identity (For Example, driver's license or passport)

After checking your credit score and getting an idea of how much you plan to put down and other factors, your lender can quote your rate and tell you the fee to lock it in. Is. At this point, it is wise to ask for details about their rate-setting policy. If everything looks good, submit a rate-setting request.

How much does a rate lock cost?

Rate locks aren't free, but that doesn't mean you'll necessarily see a line item charge for them. Most lenders don't charge a separate fee to lock in a rate within a certain period. The cost of the lock is often included in the rate offered. If your lender makes a charge, it will probably be a quarter (or equivalent) of your loan amount.

Lenders usually charge an additional fee for extending the rate lock period. However, beyond the standard 30 or 60 days, ask what to expect if you need to pick a lock.

Should you lock in a mortgage rate?

Given the rise in mortgage rates over the past year, locking in your rate can pay off.

Consider a 30-year loan of $300,000 with an interest rate of 6.74%. At that rate, you'll pay $400,408 in total interest. Let's say you don't lock your rate; when you do, the rates go up to 6.99%. For the same mortgage, you'd pay $418,567 in interest, a difference of $18,159. Consider the fees associated with locking in your rate (if any).

You can use Bankrate's mortgage calculator to understand what you'll pay based on your fixed rate.

Mortgage Rate Lock FAQs

What factors might cause my closing rate to change?

Matlock can give you peace of mind, but it's not always set in stone. This may change due to the following reasons:

• Your credit profile or score has changed (for example, by opening a new credit card).

• The lender needed help verifying or documenting your income correctly.

• You decide on different types of loans or loan amounts.

• Home appraisals were lower or higher than expected.

Review the contract before setting your rate to understand what circumstances require a change.

Can you switch mortgage lenders after you've locked in your rate?

A rate lock doesn't lock you into a deal: If you get better terms and lower closing costs from another lender, you can choose to go with that lender after the rate lock starts with the first lender.

What if I set a rate and the rates go down?

Depending on your lender's policies, you can get a lower rate. Along with standard rate locks on mortgages, some lenders offer floating rate locks, designed to help you take advantage of lower rates if they become available before you close your loan. A floating lock is a win-win: you get the security of your rate now, plus no regrets if the rate drops.

However, there may be fees associated with this option, so you need to make sure the potential savings are worth any additional costs.

Even if there is no additional fee, there will be some fine print to consider. For example, more than implementing a float-down policy may be required if rates fall slightly. Check the details to understand the threshold rates they must cross to use the float-down capability.

What if the rate lock expires before closing?

Real estate transactions are not permanently closed in time. If your rate lock expires before you have the keys, don't panic just yet: Your mortgage lender may offer to extend your rate lock for free or for a fee.

That rate lock extension fee may not even be your responsibility. Depending on who is responsible for the loan not closing on time, the lender may cover or pay a portion of the cost.

If your lender doesn't extend the rate lock, the rate and point combination you locked in may no longer be available. The loan will then be based on the new rate in effect.