What Is Locking Your Interest Rate? And Once Done, am I Committed?

Mortgage interest rates fluctuate daily, sometimes hourly. That uncertainty on mortgage interest rates can cause frustration to homebuyers. Fortunately, homebuyers can apply for a locked-in interest rate to protect them from the uncertainty in mortgage interest rates.

For first-time buyers, mortgage rate lock may sound overwhelming. Therefore, you may want to read a mortgage rate lock guide to understand how it works. So, what is a mortgage rate lock, and when should you use it? 

This rate lock information guide answers pertinent questions about rate lock agreements and how they work.  Let's dive in! 

What Is a Mortgage Rate Lock? 

A lock on mortgage loans means your interest rate will not change between the time you receive an offer and the closing. However, the rate lock agreement is valid if you do not make any changes to your application and close within the specified time frame. 

Thus, a rate lock is an insurance policy against a rising interest rate and shields borrowers from costly fluctuations. Typically, mortgage rate locks are available for 30, 45, or 60 days and sometimes lenders accept extended rate locks. 

However, when requesting an extended rate lock, be aware that the longer the mortgage lock, the higher the fee. 

When Should You Lock In a Mortgage Rate? 

When you receive a mortgage loan offer, the lender usually asks if you want to lock in the rate for a certain period or to float the rate. 

If the mortgage rates are rising, consider locking the lower rate as soon as possible. Remember that mortgage interest rates are a gamble, and no one knows what interest rates will do. Lenders set the rates based on multiple factors that change daily and sometimes hourly. 

It would be helpful to look at the mortgage rates from the past two to three months to see how they fluctuate. Locking in early might help you get what you were budgeting for from the start. So long as you close before the rate lock expires, any rate increase won't affect you. 

The ideal time to lock your mortgage rate is when interest rates are their lowest. However, this might not be easy to estimate. Note that interest rates could decrease further during the lock period. If rates drop during your lock period, you will probably pay based on the locked-in interest. Thus, you will only be able to negotiate with the lender for a new rate lock if the initial lock-in period expires. 

When considering a mortgage rate lock, remember every homebuyer has unique circumstances. Therefore, there is no universal time to lock in a rate. The decision to pay the lock-in rates depends on an individual's budget, the market forces causing interest rate fluctuations, and the borrower's financial situation. 

Some borrowers prefer locking in mortgage interest rates early, while others gamble on fluctuations when deciding to lock in or not. Ideally, assess how much risk you are comfortable with, and choose from there. 

Mortgage Lock Fees

A mortgage lock operates like an insurance premium and comes with a fee. Some mortgage lenders offer short-term mortgage locks at no cost to the borrower. 

Apart from the initial mortgage lock fees, there might be additional fees if you extend your mortgage rate lock period. For instance, if you took a six-month mortgage rate lock and did not close within the period, you might request a 12-month rate lock agreement. Depending on your mortgage lender, the extension might attract a fee. 

Discuss with the mortgage lender on extending the mortgage lock to understand the cost implications. 

For some lenders, if the interest rates remain unchanged or dropped, the extension could be free, while others charge a relatively small fee based on the interest rate fluctuation margins. 

Does a Rate Lock Commit You to a Lender?

Locking in the mortgage rate does not mean you are committed to the mortgage lender. You are free to choose a mortgage lender with more attractive interest rates. 

If the mortgage rates go down and you threaten to pull the loan, the mortgage lender might consider renegotiating the interest rate to keep you as their customer. 

When considering locking in a mortgage interest rate, seek a clear explanation of your lender's rate lock rules. If you lock in a rate too soon and end up going with a different loan type with the same lender, the rate lock might be void. 

Also, credit score changes or debt-to-income ratio fluctuations might affect the rate lock agreement. Thus, you must seek the mortgage lenders' clarification on such issues at the beginning. 

Conclusion 

Mortgage rates fluctuate constantly. A rate lock agreement can spare you the uncertainty of such fluctuations. Consider a locked-in interest rate if interest rates are relatively low or likely to rise. Please discuss with the mortgage lender to secure a rate lock so you can retain it when your new loan closes. 

MortgageWorks offers financing for new home purchase, refinance, home equity, investment property, construction and a wide variety of loan program options to fit your every need.

Servicing the state of California and the entire Coachella Valley, including Palm Springs, Cathedral City, Rancho Mirage, Indian Wells, Palm Desert, Desert Hot Springs, La Quinta, Indio and Coachella. Call Art today @ (760) 883-5700

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.