Is Now the Time to Lock in Your Mortgage Rate? | ACFA-Cashflow

Mortgage interest rates are dynamic and unpredictable, fluctuating often between the time you submit a loan application and the time you close. To eliminate ambiguity and guarantee the rate in your home loan offer, get a mortgage interest rate lock.

While interest rate locks may provide borrowers with peace of mind, they are not foolproof—you may miss out on a cheaper rate after locking, and your six hundred USD loan may not be complete before the lock expires.

What Is a Rate Lock on a Mortgage?

When you get a mortgage loan offer, the lender will often inquire if you want to lock in the rate for a certain amount of time or let it float. If your lock in, your rate should be guaranteed as long as your loan closes prior to the clock expiring.

If you do not lock in immediately, your mortgage lender may provide you a grace period — such as 30 days — or you may be permitted to wait until shortly before closing on the property.

Ascertain that you get various mortgage loan offers and compare them to determine which lender’s mortgage interest rate offer is the finest. Once you’ve identified a rate that fits your budget perfectly, lock it in as soon as possible. There is no way to forecast with precision whether a rate will increase or decrease throughout the weeks or even months required to finalize a loan.

Consequences of Not Getting Your Mortgage Rate Locked in

Without locking in your interest rate, increasing rates may require you to make a larger down payment or pay points on your closing agreement. When you pay an upfront charge — or mortgage points — to a lender, you are essentially contributing more money upfront in exchange for a reduced interest rate.

For instance, the cost of a $200,000 loan with a 30-year fixed-rate might increase by more than $60 per month if the rate increases from 5% to 5.50%, resulting in an additional $22,000 in interest during the loan’s lifetime.

“Rate locks give clients confidence about the economic parameters of their loan—most notably, their monthly payment,” says Sebastian Hart, capital markets associate at online home loan startup Better. “Without rate locks, borrowers would not know their loan’s full terms until the transaction was complete.”

How a Rate Lock on a Mortgage Works

A mortgage rate lock may help alleviate financial worry throughout the home buying process by protecting you from significant interest rate rises.

Typically, locks remain in place for at least a month to provide the lender sufficient time to complete the loan. If the lender does not complete the loan prior to the rate lock expiring, you will need to negotiate a lock extension or accept the market rate.

While it is conceivable for the market rate on your loan to go below your locked-in rate, you will be unable to benefit from the lower rate unless you have a “float down” option.

Even if you have a lock in place, your interest rate may fluctuate as a result of application-related variables such as:

Amount of new down payment

Appraisal of your house that is more or lower than the value stated in your application

Reduced credit score as a result of being tardy on payments or taking up an unconnected loan

Unverifiable income on your application

An interest rate lock agreement will include the rate, the loan type (such as a 30-year fixed-rate mortgage), the expiration date of the lock, and any points you may be paying toward the loan. While the lender may inform you of these conditions over the phone, it is preferable if you have them in writing as well.

What to Do If Interest Rates Drop After You Lock in Your Rate

If you locked in your rate early but rates have since fallen, you may choose to withdraw your existing mortgage application and resubmit a new one. However, there are several drawbacks to this strategy. You could consider the following:

Spend money on an appraisal and other charges, such as a credit check, that you’ve already paid; you’ll wind up paying for them again with a new loan application.

Pay extra for the new application’s processing if the lender or mortgage broker charges a higher cost.

Delay closing on a house, which may complicate your intended purchase if the seller requires the deal to complete on a certain date. This is less of an issue when refinancing.

However, if the gap between your potential new rate and your existing locked-in rate is significant, it may be worthwhile to abandon the loan application and pay a few hundred dollars to secure a rate that saves you thousands over the life of the loan.

Today’s Mortgage Rates

Mortgage rates fluctuate regularly, so you should monitor them prior to qualifying for a loan and locking in your rate. Bear in mind that the rate you qualify for is contingent upon your creditworthiness and a variety of other criteria. Today’s average annual percentage rates (APRs) for 30-year, 15-year, and 5/1 ARM mortgages are as follows:

When Is It Possible to Lock in Your Mortgage Rate?

When you accept a loan offer is the most usual moment to lock in a mortgage rate.

“When a consumer applies for a mortgage, they normally discuss rates and conditions with their mortgage banker up front,” says Tom Parrish, head of retail lending product management at BMO Harris Bank. “If mortgage rates are appealing to the consumer, many of them lock immediately after applications are submitted, as they do not want to take the chance of rates increasing.”

If you believe you’ve gotten the greatest deal available and are concerned about a rate hike, lock it in immediately. However, if you’re prepared to take a chance on the rate dropping in the next days or weeks, lenders may allow you to wait and grant a lock-in at a later date. Ascertain if lenders will enable you to lock in at a later date and any limits that may apply.

How Long Does a Rate Lock Last?

Rate locks typically last between 30 and 60 days, and while discussing the duration of the lock with your lender, you should factor in how long it takes to finalize a loan in your location. For instance, if your lender is experiencing a significant backlog of mortgage applications as a result of historically low-interest rates, request the maximum amount of time available.

Additionally, while discussing the mortgage rate lock with your lender, inquire if the application for a new house mortgage purchase will be prioritized over a refinancing. If so, ensure that the lock duration is sufficient to cover the mortgage application procedure.

You may help expedite the mortgage application process by promptly submitting papers needed by the lender, such as:

  • Account statements
  • Income documentation
  • Returns of income
  • Identification using a photograph

If you wait too long to respond, the lock may expire before the house loan closes. If this is the case, the lender may request payment for the rate lock extension or may share the expense with you. In other instances, the lender may be at fault and must bear the full expense.

Should You Use a ‘Float Down’ Mortgage Rate?

A mortgage rate “float down” increases the likelihood that you will get the lowest interest rate possible prior to closing. If your loan rate is locked down and it reduces throughout the application process, a float down enables you to switch to the lower rate.

You should inquire with your lender about this option before locking in your rate so that you are aware of the conditions that would apply and any associated expenses. For instance, the lender’s policy may demand that the rate decrease by a certain percentage point before you may make the adjustment, levy a fee for the rate change, and conditionally accept the loan awaiting further paperwork requests.

“Each lender has its own float down policy and qualifying requirements,” Hart explains. “Typically, a float down is triggered by a large decline in a benchmark rate between the borrower’s rate lock date and the closure date.”

The float-down option may be the best choice if you have lots of time before the loan matures and the loan application is quite simple.

The Cost of a Rate Lock

While you may be paid for a mortgage rate lock, many lenders provide it for free. Charges may be the equivalent of a very tiny percentage of the loan—for example,025 percent, which might equate to a few hundred dollars on a $300,000 home loan—but that cost can be compensated by interest savings over the life of the loan.

Costs may also vary according to the lock’s length.

“It is in the consumer’s best interest to inquire about any fees that a lender may levy and how they might be identified prior to applying,” Hart explains.

Mortgage Rate Lock Advantages

If you like your current rate, you may retain it until your loan term finishes or the lock period expires prior to closing.

You will not be affected by changes in your monthly payments since your interest rate is fixed.

You may prevent a last-minute financial scramble before closing if you are required to make a larger down payment or acquire points due to a higher interest rate.

Cons of Mortgage Rate Locking

You risk missing out on a reduced interest rate, which might save you hundreds of dollars over the loan’s term.

If the rate lock expires, you may be charged hundreds of dollars to renew it or you may lose out entirely on the discount.