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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.

Since interest rates can fluctuate daily, consumers can use rate locks to protect themselves from increases while they wait to close on their loan.

Here are essential questions and answers to help you understand how a rate lock works.

What is a rate lock?

A rate lock guarantees that the lender will honor a specific 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.

For example, if your lender locks in your rate at 4.9 percent for 45 days and rates jump up to 5.1 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 customer whether they get a rate lock. If they choose not to lock in their rate, 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.

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 while others might wait for the seller to accept the 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.

 

Pro Tip: Look for the sweet spot when pricing out a rate lock.

The sweet spot is the combination of interest rate, term and cost you need to achieve that optimum deal. Most lenders won’t lock you 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 rate for several lock periods: 15, 21, 30, 45 or 60 days. Anything longer than 60 days gets pricey, so it might be smarter to wait until you get nearer to the closing and check again.

How long can a rate be floated?

Borrowers can float their loans until the day of final underwriting and 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 see a line item charge for them. Most lenders do not charge a separate fee for rate locks within a certain period of time. The cost of a rate lock is baked into the rate you’re offered.

Fees are usually charged by the lender when the rate lock expires and the borrower wants to extend the lock period.

Pro Tip: Pay points for a lower rate

Paying discount points (one point equals 1 percent of the loan amount) might be worth it to get a lower rate. Divide the estimated monthly savings into the cost to find how many months you need to own the home to recoup the expense. Compare the interest rates quoted at different prices, and you might be surprised to find that higher discount points, combined with a lower rate, could cost less over the years you expect to be in the home.

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 extend, that combination of rate and points might no longer be available and the loan would be based on the new prevailing terms. Fees vary depending on the lender.

“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 the 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. 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?

Traditionally, a lender will lock an interest rate between 30 and 60 days with no fee.

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 who are doing construction loans, for instance, paying for an 8-month rate lock might save them money in the long run if interest rates do rise.

“Lenders are hedging that the market will go up at a certain rate, that upfront, non-refundable cost will cover that difference, if you will,” says Greene.

Pro Tip: Calculate the timing

Find out when your loan is expected to close and work backward to determine when to lock the rate. 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.