When you’re in the process of getting a home loan, at some point you’ll have to lock in your mortgage rate. This might be months in advance, mere days before closing, or some time in between.
This post outlines several rate lock strategies along with their advantages and drawbacks.
What Does It Mean To Lock A Mortgage Rate?
A mortgage lock involves a commitment by you and your lender. When you request a lock, your lender agrees to give you that rate, even if interest rates have increased. On the other hand, you are also making a commitment to close at that rate, even if interest rates have fallen.
What Does It Cost To Lock Your Rate?
The longer your rate lock, the higher the risk to the mortgage lender. So you’ll pay for the privilege. With most lenders, the standard lock period is 30 days. They quote rates assuming a 30-day lock.
By locking 7 to 15 days before closing you should get better pricing. For instance, one national lender’s rate sheet charges .15 percent more for a 30-day lock than it does a 15-day lock, and .25 percent more for a 45-day lock.
For a $300,000 home loan, it would cost an extra $750 to lock its rate for 45 days instead of 15.
The cost can get even higher if you choose to lock your rate for 60 days or more..
What About “Free” Rate Locks?
When lenders were experiencing very high volume, refinance processing suffered. Purchases get priority with most lenders, and refinance transactions can end up on the back burner.
This can result in “blown locks” for refis. To counter this and avoid angering customers, some lenders offered “free” locks of up to 90 days. However, they weren’t really free, because the rate for those loans was slightly higher than it was for purchases.
When you get mortgage quotes for a refinance or purchase, make sure you know what lock period you’re getting on your quote. That way you can make a valid comparison.
What’s The Best Time To Lock?
There are three schools of thought about locking. Some borrowers like to “set and forget” their rate, and they are averse to risking a higher rate in order to perhaps obtain a lower one.
Others are gamblers, checking rates every day in hopes of nailing down something better.
Finally, there are the ones who want it all. These borrowers buy a “float down” option, which allows them to lock in a rate, protecting them from potential rate increases. However, if interest rates fall while their loan is in process, they can get the lower rate.
Float Downs – Know What You’re Buying
There are rules for float downs. Some lenders only let you exercise the float down option the day they draw your closing documents. Others allow you to lock in a lower rate anytime during the process.
Still, others require the new rate to be at least a certain percent lower than your locked rate before they let you switch — .125 to .25 percent is typical.
Read your documents carefully, and understand what a float down will cost you since these agreements are not standardized.
You Blew Your Lock – What Now?
If you or your lender fails to complete your loan during the lock period, you lose the protection from rate increases but you don’t benefit if rates have fallen. You close at the higher of either the rate you originally locked, or the current interest rate for your mortgage.
However, if rates are rising, you might be better off extending your lock. This costs extra, but may end up being less expensive than the new, higher mortgage rate. For instance, one lender charges .02 percent per day to extend a lock. If new rates are .25 percent higher, it would cost about one percent to get the rate back to its original level. So if you miss your closing by five days, it’s absolutely worth paying .10 percent to save one percent.
How To Close Quickly And Save Money
One way to make sure that your loan closes on time is to have all your required documentation ready for your lender. Whenever you’re asked for something else, supply it immediately.
Even if your closing date is weeks away, get your stuff in now. That’s because your new documents may trigger questions from the underwriter, requests for new information, etc. You don’t want your loan derailed by an eleventh-hour request.