Mortgage experts often recommend locking your mortgage rate once you’ve been approved for a loan and have signed a purchase agreement. With interest rates remaining near historically low levels, a rate lock may not seem essential, but even a quarter- or half-point rise can result in a large change in your monthly housing payment. Before committing to an interest rate lock, buyers should consider several factors, such as timing and fees.
What does a rate lock do for a homebuyer?
A rate lock guarantees you a certain interest rate on your mortgage loan for a certain period of time, usually long enough to settle on your home. Some rate locks also cover the amount of points charged for a loan. When you choose to lock in a rate may depend on how quickly rates are moving and how much time you need to close. If rates are stable and remain at historic lows, you may want to wait until closer to settlement to lock. However, if rates begin to tick upward, you will want to lock in the interest on your loan as soon as you are ready to move forward with a home purchase.
Rate lock time periods
Most rate locks are available for 30 or 60 day time periods. Longer periods may be available on request, but you may be charged fees or extra points for an extended rate lock. Short-term rate locks may also be available and may be something you may want to discuss with your loan officer if rates begin to rise as your settlement approaches.
Cost of rate locks
According to the Federal Reserve’s Consumer’s Guide to Mortgage Lock-Ins, some banks may charge rate lock fees. If you request a longer rate lock period due to delays with your settlement, banks may charge a higher fee for an extension. One other potential cost of a rate lock is simply the missed opportunity — if interest rates decrease during the rate lock period, you may not be able to take advantage of the lower amount. Some banks allow a one-time buy down of your interest rate lock if rates do drop. Others allow you to purchase a buy-down provision, sometimes by charging additional points.
Why lock your rate?
In times of rising interest rates, locking your mortgage rate is practically a necessity. After calculating a monthly housing payment and submitting an offer on a house based on your budgeted payment, you don’t want to risk rates rising and leaving you unable to afford your home. Rate locks offer peace of mind. For some homebuyers, the knowledge that their payment is capped on the high end is enough satisfaction for them to risk missing out on a more favorable rate.
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