When Should You Lock in a Mortgage Interest Rate?
That kind of money could make a huge difference. It could be as easy as locking your mortgage rate once you are ready to make an offer for your house.
You could lose your preferred rate and any savings you make if you lock too soon. It is important to learn about closing timelines as well as how mortgage rate locks work.
What is a Mortgage Rate Lock?
The mortgage interest rates can fluctuate like a pinball. Mortgage loans can take up to a month to close so it is important that you are able to know what your final mortgage rate will look like by the closing date.
You must first complete a 1003 mortgage application form. This form is accompanied by mountains of documentation that documents your income, assets, and firstborn child. After reviewing your loan application, the lender approves it and you can apply for a mortgage.
However, this does not mean that you are ready to move on. You must submit the mortgage preapproval letter if you are buying a house or an investment property.
The clock begins to tick once you sign a contract for real estate sales. The “time is of the essence” clause doesn’t mean you have to close the deal by a specific date. Otherwise, your earnest money deposit and contract will be forfeited.
You can now call your loan officer to tell them that you are ready to go. The loan officer can then lock in the moment’s mortgage interest rate for you. This will guarantee that you receive that rate if your settlement is within a specified timeframe. Refinance your mortgage is the same, but you may not need to do this as urgently.
Fixed-interest mortgages and adjustable-rate mortgages (ARMs) are both subject to rate locks. They determine your initial introductory rates.
How does a mortgage rate lock work?
You still have the interest rate that was locked in by the loan officer, regardless of how much the interest rates rise between then and the time you settle.
The reverse can also be true. You still have to pay the higher rate of interest rates to drop.
You cannot buy a float down option.
What Is a Float-Down Option?
You can protect yourself against interest rate drops after locking in your rate. This allows you to pay your lender for a “float down option” which will allow you to close your loan at a lower rate.
However, float-down options can come with a price. This cost can be in the form of either an upfront fee or higher settlement fees. You could end up paying a higher interest rate if the option isn’t activated.
Interest rates must drop by a minimum amount before you can benefit from a float-down offer. The lender may set the minimum drop distance at 25 basis points or 0.25%. You can’t use the float-down option if rates drop by 0.2%.
Another point is that you are responsible for redeeming your float-down option. The information will not be shared with your lender. Keep an eye on interest rates and ask your lender to redeem the option if they fall. The option can only be redeemed once and then your rate will lock normally.
Before you decide to opt for the float-down option from your lender, make sure that you are familiar with all costs and rules.
Mortgage Rate Lock Fees
The more time you lock your rate, the more likely it will come with fees.
Your lender may offer a 30-day free lock. However, if you request a 60-day lock, the lender could charge an additional fee. This fee is expressed as a fraction of or multiple mortgage points. A mortgage point is 1% on the loan amount — $4,000 for a $400,000 loan, for example. However, your lender may give you a break by charging a fraction of the full point.
You can extend your rate lock if you are unable to settle within the time frame. However, this is often done at a similar fee. You may be able to get a mortgage if the rates have dropped in recent years, but do not count on it happening.
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When to Lock in a Mortgage Rate of interest?
Lock in your interest rate as soon as you are ready to move forward with your loan application.
It is possible to gamble on interest rate falling, and then delay locking in a rate. But that’s just gambling. If you don’t have the ability to predict the future, lock in your rate only when you are ready.
When you apply for a purchase loan, you must sign the purchase agreement. refinancing is easier because there’s no seller. You can decide when you want to settle and then work backwards from there.
Remember to pay the interest within the lock period. Otherwise, you may end up paying more. Mortgage loans usually settle within 30-60 days. You should ensure that your loan officer, underwriting team and other staff members are working towards a timely close.
How to Lock in a Mortgage Rate
The rate is locked by your mortgage broker or lender on your behalf. In most cases, the loan officer will ask if you are ready to lock in a rate.
Before you lock in a rate to, take the chance to negotiate a lower interest after doing some comparison shopping. In exchange for higher fees, you can negotiate a lower rate. These are known as the discount points in the industry.
Check with your loan officer the length of the lock and get a written commitment that they can close within the time frame. Although it is not legally binding, this commitment gives you more leverage in the event they are late.
Mortgage Rate Lock FAQs
Although interest rate locks can be quite simple, many first-time homeowners have questions. When applying for a mortgage, keep these things in mind.
If you are looking to refinance your mortgage quickly, then lock in a rate after you have chosen a lender and been approved. While you could hold off and wait for lower interest rates to save money, this could also backfire.
What is the maximum time you can lock in a mortgage rate?
A mortgage rate lock can usually be locked in for between 15 and 60 days. This includes conforming loans and non-conforming loans.
Your lock period will vary depending on market conditions and the policies of the lender. When mortgage rates rise, lock periods can be shorter and longer.
Sometimes, shorter lock periods (15 to 30 days) are free. Additional fees are often charged for longer lock periods.
Rate Lock Expire
You can usually ask your lender to extend your rate lock. However, if you ask your lender for a rate lock extension, they might charge you for it, even though they were to blame for the delay.
You are at the mercy of the current mortgage rates if you don’t prolong the locked rate. Your loan rate will revert to the market. This means that your monthly loan payment will be higher in an environment with rising interest rates.
Do rates fall after I lock in a rate?
When you choose a float-down option, it triggers your interest rate will fall according to the terms.
You may also find a lower monthly repayment if your lock period expires prior to the loan closing.
If you do not, your loan will be closed at the rate you have locked in, regardless of the market rate at the time you close your loan.
Can I Reject a Mortgage Rate Lock?
Technically, yes. A rate lock can be retracted. However, it can have serious consequences.
Your entire mortgage application would need to be cancelled. Your file would be deleted by the lender and you would have to apply for a new loan. This could mean that you would have to pay for a new home valuation.
This will restart the long loan process and push back your settlement date. You can default on the sale contract if you have made an offer for a house. This could result in you losing the house to another buyer.
There are many types of mortgages. However, almost all have rate locks.
Be careful not to play the interest rate roulette. Lock in a home mortgage rate only when you are ready to proceed with a mortgage. If you feel the need, you can opt for a floating-down option. You shouldn’t attempt to predict.
One way to reduce your interest rate is to improve your credit score. Although market interest rates fluctuate, lenders charge a higher premium than benchmark rates for borrowers with good credit. It can lower your monthly payment and also reduce your down payment.