If you are actively looking for a house, has your lender mentioned a mortgage rate lock yet? For first time home buyers, this could be a new term. A mortgage rate lock is a freeze on an interest rate that holds it at the same number during the time between applying for a mortgage and closing on a home. They can be beneficial for buyers but do come with some rules. Let’s learn more.
Why does a mortgage rate lock exist?
Mortgage interest rates change quickly. They can be different from day to day or even alter within a single day. While the changes may be small or big, these changes in interest rate can affect your buying power and how much your monthly mortgage payment will be. In order for buyers to have a clear picture of what they are committing to financially, mortgage rate locks allow buyers to lock in a certain rate despite any fluctuations in the interest rates.
What are the benefits of a mortgage rate lock?
A mortgage rate lock protects buyers if interest rates suddenly rise. For example, if you lock in a mortgage rate at 6.9 percent while waiting for your home to close and the interest rate rises to 7.1 percent, with a lock you will still pay 6.9 percent. However, if the interest rate falls, you will still pay the rate that you locked. Some lenders offer float down policies that allow you to qualify for the lower interest rates; ask about this option with your lender. Sometimes float down options come with fees.
How long does a mortgage rate lock last?
The time frame for a mortgage rate lock can vary between lenders. It usually is between fifteen and sixty days. If you have a locked rate and something happens to extend your home purchase beyond the rate lock, buyers can pay a fee to have the rate extended.
When should you do a mortgage rate lock?
To determine the best time to lock the rate, talk to your lender because it may be specific to your situation. If there are strong indications that mortgage rates are going to drop, you lender may recommend waiting a few days until that happens. However, no one has a crystal ball to give the exact date of the lowest rate during your home buying period.
In general you can lock a mortgage rate from the time you receive an initial loan approval to five days before closing. It’s always best to ask your lender because their company may have different guidelines for a mortgage rate lock.
Since you don’t want your rate to expire, if you are just starting your home search it may be best to wait until you have made an offer or have some serious contenders to lock the rate. If not, you may feel pressured to find a home and close on it before your mortgage rate lock expires.
Like anything related to finances, I would strongly suggest that any buyers stay in open communication with their lenders during the home buying process. Always remember to check in with your lender before making an financial changes because even positive things like paying off a credit card can impact your loan. Rules and requirement are different among lending companies too, so it is best to ask your lender what the policies are with the lending company.
