There is a sense of peace that you obtain when you utilize a mortgage rate lock. You have the knowledge that you will not have to take a higher interest rate no matter what rates do once you lock. Of course, not every situation is ideal for locking the rate. Knowing when you should lock and when you should float can help you get the most out of your new mortgage.
Definition of a Mortgage Rate Lock
First, let’s look at what you can expect from a mortgage rate lock. It is basically a promise from the lender to provide you with the specified interest rate when you close, even though you will not close for a few weeks or even months. You agree to lock the rate at a specific price and for a predetermined time period. The rate lock is not indefinite. The longer you lock the rate, the more you pay in most cases.
Once you lock the interest rate, you do not have to pay the higher prices that might prevail when you close on your loan. The typical lock period is 30 days, but some lenders offer 45 and 60 day lock periods as well as shorter periods. Keep in mind that if rates decrease, you still pay the higher interest rate that you chose to lock, so it is a gamble both ways.
Paying for the Rate Lock
Rate locks typically do not cost money, but you can opt to pay for them if you want a lower interest rate. Generally, the lender will provide you with a quoted interest rate that does not cost you any points. The rate is good for a specific lock period, typically 30 days. If you want a longer lock period, you will have to pay for that rate then. This is when the points come into play. One point equals one percentage point of the loan amount. You can also pay points if you want to obtain a lower interest rate. The points you pay are prepaid interest charges and can be written off on your taxes.
Can you Float the Interest Rate?
One question many borrowers have is if they really need to lock their interest rate. Generally, you do not have to until a few days before the closing. The lender needs you to lock into a rate ahead of time at some point, in order to prepare your closing documents, though. Every lender has a deadline they enforce to ensure that all loans close on time.
That being said, you take a big chance when you float the interest rate. Because you did not set anything in stone, you are subjected to the rate of the day. This can go either way for you. If you did not lock the interest rate and they decreased, you are in luck. On the other hand, if you did not lock and they increased, you are stuck with the higher interest rate.
Determining the Right Lock Period
One of the hardest tasks when you lock the interest rate is to determine how long to lock the rate. Most lenders do not let you lock anything until you have an executed sales contract. Once you have that contract in hand and the lender already preapproved you for the loan, the lender knows how long you should lock the rate. For example, if you are not closing on your home purchase for 60 days, you should probably wait to lock the rate unless they are really attractive right now. The longer you lock your interest rate, the more it costs you either in prepaid points or in adjustments to the rate itself. If you can wait until you hit the 30-day mark, you have the best chance at securing the best rate.
Extending the Lock
Sometimes circumstances that are outside of your control force you to miss your rate lock expiration date. This means that you no longer have a mortgage rate lock. Every lender handles this situation differently. Some lenders enable you to pay an extension fee to keep the interest rate you had while others require you to take the current market interest rates. Before you lock in a rate with a lender, you should ask them what the procedure is so that you know ahead of time what to expect. If an extension is not a possibility, it might be necessary to shop for a different lender that will entertain an extension if you see that as a necessary component for you.
Determining whether you should take advantage of a mortgage rate lock is a personal decision. You have to weigh all of the pros and cons of locking the rate and floating it to decide what is right for you. Talk with the lender that knows all of the circumstances surrounding your mortgage file to get input on what is right for you. Eventually, you will have to lock the rate before you can close, but figuring out the right timing will require you to get professional input to secure the best interest rate available to you.