If you’ve already begun researching what it means to buy or sell a home, you’re probably well-aware that in the world of real estate, numbers can change every day. You might also know what a rate lock is. Rate locks can be great tools to protect your budget as you go through the origination process (from receiving an initial quote up until your closing day). If you still aren’t sure whether a rate lock may make sense for you, we’re here to help.
In this article:
- How do I decide if it’s time to lock my rate?
- How long will my rate be locked?
- What could happen if I choose not to lock my rate?
- What if rates go down after I lock my rate?
- What happens if my lock expires and my loan hasn’t closed?
- Is locking my rate going to cost me anything?
- What if I decide to change lenders after I’ve locked my rate?
- Is my rate lock guaranteed?
How do I decide if it’s time to lock my rate?
Because none of us can predict the future, only you can decide whether now is the time to lock your rate. Once you’ve found a property you want to buy and shopped around for a lender, you’re in a good position to decide if it’s time to lock your rate. At that time, you’ll have an accurate idea of 1) how much money you’re going to borrow; 2) how much your monthly payment will be; and 3) what your initial interest rate will be. However, things can change as underwriters review your loan application and learn more about your financial history and the property.
It essentially boils down to this: if you’re comfortable with the interest rate and payment you are offered initially, and if you are prepared to make those payments for the term of the loan, then it’s probably time to lock the rate.
How long will my rate be locked?
The goal of a rate lock is to protect the interest rate you’ve been offered (and therefore, your budget) while your loan is in process, leading up to your closing date. While the specific answer to this question depends on your mortgage lender, rate lock periods can range anywhere from 15 to 180 days or longer. Rate locks are generally offered in 15-day increments.
Borrowers looking to buy immediately and have their eye on a specific home usually obtain rate locks that last between 30 to 60 days.
What could happen if I choose not to lock my rate?
You should never feel pressured to lock your rate, but for many of us, rate locks provide stability in an ever-fluctuating market. Interest rates change daily (and sometimes more often). If you elect not to lock your rate, that is called floating your rate.
When you float your rate, your loan’s interest rate could go either up or down. That means everything from your anticipated loan payment to the overall cost of the loan can also rise or fall. Additionally, if you don’t lock the rate and the rate subsequently rises, you may be required to put down a larger down payment in order to maintain your monthly payment.
What happens if my lock expires and my loan hasn’t closed?
Maybe your seller had an emergency. Maybe your loan settlement agent caught the flu, or maybe construction was delayed. Whatever the reason, your closing date has been pushed back and now your rate lock will expire before closing. Things happen, but you may be able to use a rate lock extension to keep your locked rate.
Rate lock extensions often come with a fee, but depending on who is to blame for the loan failing to close on time, that fee may not be yours to pay (or you may only need to pay a portion).
Lenders can choose whether to extend a rate lock. If your lender doesn’t extend the rate, your loan will be based on the current prevailing market rate.
Is locking my rate going to cost me anything?
Whether you pay separate fees for choosing a rate lock varies by lender and location. For example, some states do not allow a lender to charge a separate rate lock fee, but they may charge an application fee.
Extension fees are subject to change due to market conditions, so you’ll want to speak with your loan officer about this possibility when you are determining whether to lock your rate.
NOTE: Your rate lock is determined by your anticipated closing date, but know that you can give yourself some cushion by paying for a rate lock that extends a few days beyond your closing date if you want to be conservative or have reason to think you may need a little more time. When you are considering the cost of a 30-day lock vs. a 45-day lock, you may find it cheaper to pay for a longer rate lock period rather than risk paying for an extension, too.
What if I decide to change lenders after I’ve locked my rate?
There’s no law preventing you from changing lenders after locking your rate. You won’t pay fees or penalties just because you switch lenders. The rates and rate lock options your new lender offers may differ, as well.
If you need to change lenders, you should also realize that there are costs associated with switching lenders once you’ve begun the process of buying a home. For example, some fees you paid the lender are non-refundable. You can change lenders, but if you already paid an application fee, or for a home appraisal, for example, you may have to pay those fees all over again with your new lender, so be prepared for that.
Is my rate lock guaranteed?
Actually, if a lender has grounds to void your rate lock, you could lose it. It is important that you provide the most accurate information possible when applying for a rate lock, and that you do not make any major changes to your credit profile before you close on your home loan. If there are discrepancies in your mortgage application, or if your financial situation drastically changes, your lender can void your rate lock.