Homebuyers want to find the lowest possible interest rate on their mortgage. Once they do, the last thing they want is for that rate to rise before the loan is finalized.
As mortgage rates fluctuate during the coronavirus pandemic, it’s more important than ever to make sure the rate you are quoted is the rate you’ll get at closing. In addition, during this crisis, closings are taking longer because of constraints to capacity all along the line, and you want to make sure any lock you get will be good for enough time to make the closing.
Since interest rates can fluctuate daily, rate locks are a critical tool for consumers to protect themselves from rate increases that occur while they wait to close on their mortgage loans.
Here are some key points about rate locks and how they work:
What is a rate lock?
A rate lock is a guarantee assuring that a mortgage lender will honor a specified interest rate at a specific cost for a set period. The benefit of a mortgage rate lock is that it protects the borrower from market fluctuations. Naturally, though, it puts pressure on borrowers to make sure that they close on homes before the rate-lock period expires.
For example, if your lender locks in your rate at 3.75 percent for 45 days and rates jump up to 4 percent within that period, you’ll still get your loan at the lesser rate.
“Mortgage interest can change every day and sometimes even multiple times a day, so we always recommend that borrowers lock in their rate,” says Richard Greene, branch manager and loan officer at New Mexico Mortgage Company in Albuquerque.
It’s up to the borrower to seek a rate lock. If they choose not to do so, and they have no rate lock, this is known as “floating” a rate. That’s not a bad strategy when interest rates are generally falling, but it could be costly in a rising-rate environment.
With the volatility in the mortgage markets being seen in the first quarter of 2020, a rate lock is a must for risk-averse people who are seeking a mortgage. It’s a good idea to ask for a 45-day lock at a minimum; 60 days is even better.
When can a rate be locked?
It depends on the lender, but some lenders will lock in a rate once the borrower is pre-approved with just an address of a prospective home. Others might wait for the seller to accept the buyer’s offer.
If you lock too early, however, you might end up exceeding the expiration date and facing extension fees or whatever rate is then prevailing. Keep in mind that the lender can void a rate lock if certain items on your credit report or mortgage application change between the time of your agreement and final underwriting.
The sweet spot is the optimal combination of the interest rate, term and costs. Most lenders won’t lock your rate for less than 30 days unless you’re ready to close, and often offer the same rate for a 15- and 45-day period. Ask about the rates for several lock periods: 30, 45 or 60 days. Any term longer than 60 days gets pricey, so it might be smarter to wait until you get closer to the closing and check again.
How long can a rate be floated?
Borrowers can float their loans until the day of final underwriting. The float is typically 30 to 60 days, but it might be longer — if you’re willing to pay more in fees to get it.
How much does a rate lock cost?
Rate locks aren’t free, but that doesn’t mean you’ll necessarily see a line item charge for them. Most lenders do not charge a separate fee for rate locks within a certain period of time. Instead, the cost of a rate lock is often baked into the rate you’re offered.
Lenders usually charge an additional fee for extending the term of the rate lock period. It’s a good idea to ask about this at the outset.
What happens if the rate lock expires before closing?
The lender might offer to extend the rate lock, either free or for a fee. If they won’t do so, the combination of rate and points you had expected might no longer be available. In that event, the loan would be based on the new prevailing rate.
“Typically, an extension costs .375 percent of the loan amount. If the loan is $100,000 then a 15-day extension would cost $375. And then you can extend again. If rates have gone up, it might be cheaper to pay the extension fee upfront,” says Greene.
Find out when your loan is expected to close and work backward to determine when to lock the rate. And try to give yourself some cushion: If you think you need 45 days to close your loan, find out what the interest rate would be if you locked it for a 60-day period.
How long can a rate be locked?
Historically, lenders have locked in rates for 30 to 60 days.
After that, the borrower might have to pay a fee to extend the rate lock. The extension can be for 90 days to as many as eight months, depending on the lender.
For people getting construction loans, for instance, paying for an eight-month rate lock might save them money in the long run if interest rates rise.
“Lenders are hedging that the market will go up at a certain rate–that upfront, non-refundable costs will cover that difference,” says Greene.
What about a float-down lock?
Some lenders will offer a rate lock with a float-down provision. This means that if rates fall within a specific period after your loan is approved, you get the lower rate. If rates go up, you get the rate you were quoted. There’s an additional cost for this, so make sure it makes sense for the possible savings involved.