When To Lock In A Loan Rate

What Is A Rate Lock?

A rate lock is a promise from a mortgage lender to offer a particular interest rate at a specified price for a set period. The cost of a mortgage loan is usually expressed in points. These are the fees paid to get a particular interest rate. Points are prepaid interests. The lower your interest rate, the more points you pay. 1 point equals 1 % of the loan amount.

The rate lock protects the borrower against rising interest rates. For example, if a borrower locks in a rate of 4 percent, they will only have 4 percent interest to pay, even if rates go up during the loan application process. A rate lock lasts for 30 to 45 days. However, it can be extended by the lender.

What Happens If The Rate Goes Up Or Down After You Lock In The Rate?

You will not be affected if interest rates rise during the lock-in period. Instead, you will continue to pay the lower rate you locked in. However, if you lock in a rate and then the rate drops, you will not be eligible to benefit from those lower rates. Instead, you will pay the higher rate you locked in. However, there are exceptions. First, if your rate lock agreement contains a "float down" clause that states that rates can drop during the rate lock period and the borrower can benefit from the lower rates, you should be able to get a loan with a lower interest rate. This provision can be expensive, so think carefully about the risk of falling interest rates. You can also rewrite your rate lock to reflect the lower rate. However, this can be costly.

When Should You Lock In Your Rate?

It is a good idea to sign a purchase agreement for a property before you lock in your mortgage rate. Next, search for a mortgage rate. Do your research online to find out the best rates. Finally, ask your lender (in writing). Before you lock the rate, think about these important points: Rate locks usually expire after a few weeks or 60 days. If your loan is not processed within this time, the rate lock offers you received will be canceled. Therefore, you need to ensure that your lock-in period is sufficient to allow the lender time to process the loan. Ask the lender for the average loan processing times and ask them to lock in your rate as long as you can to protect yourself.

Do You Choose A Longer Rate Lock Period?

Consumers should select a longer rate lock period to guarantee they get the agreed rate, even if processing delays occur. There is a catch. If you choose a rate lock that lasts longer than 90 days, the interest rate may not be as competitive as a shorter-term lock. Or the lender may charge fees for a longer lock. Normally, if a loan does not close within the lock period, the borrower will pay the "worst-case scenario" price to relock the loan. This is the difference between the original lock price and the current interest rate. Ask your lender for details about the rates and costs of different length periods.

Is It Expensive To Lock In Your Rate?

Rate locks can cost money sometimes and not always. Rate lock fees can be flat fees, percentages of total mortgage amounts, or added to the interest rate you lock. Fees may be non-refundable or refundable. Short-term rate locks, which last less than 60 days, are usually free. However, they can cost between 0.25 and 0.50 percent of the loan total or several hundred dollars. Longer-term rate locks are usually more expensive.