When you lock in your mortgage rate, you protect yourself if interest rates go up before you close on your new house. However, mortgage rates can move down, too. If you’ve already locked in your rate and interest rates fall, you may have to pay a fee to reduce your rate.
Since even a small change in your interest rate significantly affects how much you pay over the life of your loan, it’s important to understand mortgage locks and how they work. Read on to learn about this important aspect of the mortgage process.
How locking in a mortgage rate works
To ensure you know exactly what rate your loan will have at closing, lenders allow you to lock in a mortgage rate. A rate lock does just what it sounds like: It locks in the rate for a set time so you know what your mortgage payments will be at closing.
Finance of America Mortgage offers its own rate-lock program called Lock and Live, which allows you to keep your interest rate in place for up to 90 days while you shop for a home. Contact a local Finance of America Mortgage Advisor today to learn more.
When can you lock in a mortgage rate?
The lender may offer a rate lock after you have signed a contract to purchase a home, have applied for the mortgage, and the lender has approved your loan. The rate lock may be disclosed on the loan estimate provided by the lender.
However, even with a rate lock, the lender can change the interest rate if certain factors on your application change. For example, if your credit score goes down because you missed a payment or the contract price of the home goes up because of appraisal issues, the lender can increase the interest rate despite the mortgage lock.
How long does a mortgage rate last for?
The mortgage rate lock period varies depending on the lender. Typically, rate locks last between 30 and 60 days.
Know how long your rate lock lasts to be sure it’s still in effect when you close.
How much does it cost to lock in your mortgage rate?
Mortgage rate lock fees vary by lender. Some lenders don’t charge you for the initial lock but will charge a fee if you extend it.
The fee to extend a mortgage rate lock will likely be a small percentage of the total amount of the loan. Your lender may use the term “points.” One point is 1% of the loan. For example, the fee to extend your lock might be one-quarter of a point, or 0.25%, depending on the length of the extension.
If your lender charges one-quarter point to extend the lock on a $300,000 mortgage, you’d have to pay $750 for the extension.
When is the best time to lock in your mortgage rate?
When your lender offers a lock, you’ll have to consider whether to lock it right away or wait to see if rates improve. Several factors may influence when you should lock in your rate.
If you’re happy with the rate you’ve been offered and the lock will last at least until your expected closing date, it makes sense to lock the rate immediately. That way, you know exactly what your rate and monthly payments will be. By locking, you’ve eliminated any danger of rates going up and increasing the cost of your mortgage.
But if you’re not ready to lock in, review these factors to decide when would be the best time to exercise your lock.
Interest rate trends. While interest rates fluctuate daily, pay attention to the overall trend. Are rates generally moving down or up? During periods of inflation, the Federal Reserve may increase interest rates to limit inflation. If rates are trending up, it makes sense to lock in your rate now. If rates are trending down, you may choose to wait and see if you can get a lower rate.
Financing costs. If you’re buying a home at the top of your budget and can’t afford more than what your lender is offering, lock the rate as soon as possible. If you wait and rates go up, you may no longer be able to afford the monthly payment. You then might have to increase your down payment to qualify for the loan.
How should you react if interest rates drop after your rate is locked?
What if you lock in a mortgage rate and rates go down? Nobody likes buying something only to discover it went on sale shortly after. Some lenders offer a mortgage rate float-down option to prevent homebuyers from experiencing that with their mortgage.
Mortgage rate float-down option
With a float-down provision, the lender will lower your interest rate if mortgage rates drop during your lock-in period. You may have to pay a fee for this provision, just as you may have to pay for a lock extension.
If your lender doesn’t offer a float-down option and rates fall substantially, you have a few options to try to lower your rate. The simplest is to ask your lender if they will lower your rate and how much it would cost to do so.
If the lender isn’t willing to reduce the rate, you could consider applying for a mortgage with another lender. However, applying for a new mortgage will add to your homebuying expenses because you may have to pay for application fees, a new appraisal, and other costs you’ve already paid with your existing lender. Additionally, the new loan will have to go through the same approval and underwriting process, which would push your closing date back by weeks. The home seller may not be willing to wait that long and break the contract.
Before taking such a drastic step, consider how much you would benefit from the lower interest rate. If you’re taking out a 30-year, fixed-rate mortgage for $200,000, you’d save $57 in principal and interest each month if the rate fell from 4% to 3.5%. You have to decide if it’s worth the trouble and expense to save $684 per year. That adds up over time, so use a mortgage calculator to determine your savings.
Mortgage rate lock FAQs
What happens if your rate lock expires before closing?
The lender may be willing to extend the lock, although you may have to pay for the extension. The cost of an extension varies based on how long you need to lock in the rate.
Does locking your mortgage rate commit you to your lender?
No, the lock doesn’t commit you to the lender. Additionally, the rate lock doesn’t protect you if there are changes to your loan application. For example, if you change the kind of mortgage you want or decide to make a lower down payment, the lender can change the rate.
Does preapproval lock in your mortgage rate?
Preapproval doesn’t lock in your mortgage rate. Preapproval is an early step in the mortgage process. The lender will look at your credit history and documents showing your income and assets. However, preapproval doesn’t guarantee you’ll get a loan from the lender.
Talk to your lender about locking in a mortgage rate after you have a contract on a house and have received final approval on a loan.
How much does it cost to extend a mortgage rate lock?
The cost of extending a loan will vary depending on the lender, the size of the loan, and how much longer you want to extend the lock. The cost will be a small percentage of the total loan amount.
To learn more about our Lock and Live program and the benefits of locking in your mortgage rate, talk to a local Finance of America Mortgage Advisor today.