Mortgage lenders typically lock, or reserve, a borrower’s quoted interest rate for 30 or 45 days. But for some people, that’s not enough time. Can you get a longer lock, if you want one, and if so, would it be worth the cost?
Maybe yes, maybe no.
A rate lock, or lock-in, is a mortgage lender’s commitment to offer a borrower a specific interest rate and points for a set period. If mortgage rates rise, the lender must honor the locked-in rate. If mortgage rates drop, the borrower might have an option to obtain the lower rate, depending on the terms of the rate lock.
Have an offer accepted first
A mortgage rate typically cannot be locked until the borrower has identified a property address. The address is obvious for borrowers who want to refinance an existing loan. Borrowers who want to buy a property usually must have a signed purchase contract before they can lock a rate.
Borrowers who don’t want to lock can float their mortgage rate until a week or so before closing, when the lender needs to prepare the closing disclosures and documents.
Cost to lock
Borrowers typically don’t pay upfront for a rate lock, but that doesn’t mean a lock is free. Instead, the cost is built into the fees, rate and closing-cost credit, if any. A longer lock usually is more costly than a shorter one.
Michael Becker, a mortgage banker at WCS Funding in Baltimore, says a 45-day lock might cost an eighth to a quarter of a point more than a 30-day lock. Meanwhile, a 90-day lock might add as much as three-quarters of a point, depending on the lender and market rates. One point equals one percent of the loan amount.
“As you get further out, the lock starts to get very expensive,” Becker says.
There are some situations when a longer lock makes sense.
For instance, a buyer who has only 30 days to close would be smart to get a 45-day rate lock because “there’s always something that could potentially (delay) closing,” says Bert Carpenter, a loan officer at Nova Home Loans in Chandler, Ariz.
A longer lock might also be warranted for borrowers who want to run out the calendar on a rental lease, buy a house that’s under construction or sell a current residence. In each case, the borrower must do the math and weigh the cost against the peace of mind.
Lock extension: Maybe
A lock that’s due to expire can be extended sometimes, but not always. It depends on the lender’s policies and market rates. If an extension is possible, it could be costly.
“The cost of acquiring a 45-day lock is significantly less than acquiring a 30-day lock and then extending it for 15 extra days,” Carpenter says. “My guidance to borrowers is to be very careful about the gamble.”
Lenders can’t pass along the cost of an extension to the borrower without updating their disclosures, explains Greg Cook, a senior loan officer at Platinum Home Mortgage in Temecula, Calif. That can further delay the loan closing.
Shop, walk, float
Some lenders won’t offer long rate locks due to the risk that the borrower might walk away from the commitment if interest rates drop.
“The buyer says, ‘I will take (that rate),’ and as soon as they get close to closing, if rates are lower, they want the lower rate,” Cook says. “When it comes to a quarter of a percent, there is no loyalty.”
Long, luxuriant locks
Fred Arnold, a loan consultant for American Family Funding in Santa Clarita, Calif., describes himself as a “big fan” of longer rate locks if the borrower fears rising interest rates. He’s especially keen on loan products that offer a so-called “float down” option that allows the borrower to capture a lower rate during the lock period.
“There are 90-day and 120-day locks,” Arnold says. “Do those make sense? Absolutely, depending on what cost the lender is going to charge you and whether you have the ability to drop the rate if rates drop.”
The added cost of the float-down option normally isn’t paid upfront but, again, is built into the loan rate, points and fees.
Longer lock, more docs
Borrowers who opt for a longer lock need to be extra careful not to change their financial situation over the longer timeframe, Becker says. They also should know that they’ll need to supply updated documentation even after they’ve qualified for their loan, and that most lenders will pull a fresh credit report a day or two before closing.
“You have to make sure you still have the money to close and you still have the same job and income to qualify,” Becker says. “That would all have to be re-verified.”