All About Locking Your Mortgage Rate
Updated: Sep 3
At some point during the mortgage process, the contract interest rate (the one that ends up on the Promissory Note--the most official document stipulating the terms of repayment) must be “locked.” This means that there is an agreement between the borrower and the lender regarding what the contract rate will be. The rate lock will also specify a date by which the mortgage must be closed and funded.
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Conclusion
Introduction - All About Locking Your Mortgage Rate
Are you planning to buy a home and wondering about mortgage rates? One crucial aspect of the home buying process is understanding the concept of 'locking your mortgage rate.' This guide will delve into what it means to lock a mortgage rate, the benefits of doing so, and how the process works.
Lock Time Frames
Rate lock time frames can vary. Historically, the most common time frame had been 30 days. The regulatory changes of the post-meltdown era caused slightly longer turn times for the various steps in the mortgage process, resulting in an increased prevalence of 45 and 60-day lock times. There continue to be shorter and longer lock time frames as well, depending on the lender. These include, but are not limited to 10, 15, 21, and 90 days.
In some scenarios, or among certain lenders, the borrower doesn’t have any input as to when and for how long the rate will be locked. The borrower may either agree to the lender’s lock policy or take their business elsewhere. In most cases, however, there is a certain degree of liberty when it comes to choosing “when” and “for how long” to lock. In these cases, mortgage originators will help manage expectations as to how quickly the process can be completed, with the generally understood goal being to set a locked window that leaves plenty of time for the loan to fund, but that also isn’t unnecessarily long.
Cost Considerations
Why wouldn’t we want a lock time frame that’s unnecessarily long? Bottom line: the longer the lock window, the higher the cost. When it comes to the mortgage process, costs associated with your rate can take the form of changes to the rate itself or changes to the upfront cost (discount or rebate) associated with that rate. Locking the same rate for longer means that the discount cost will be higher or the rebate will be lower. The relationship between days of lock time and cost isn’t always exactly linear, so it can make sense to weigh the risk and rewards of various time frames.
When to lock
There’s no universally correct answer to the question: “Should I lock or float.” It’s one of the most thought-provoking and complex topics in the world of mortgage origination. There are too many variables for one methodology to be applicable to every scenario. It goes without saying that locking as early in the process as possible will always be the safest option for the borrower. It’s also unequivocally true that it’s historically the least profitable option on an average day from 1980 on. That said, this is only the case because interest rates have generally been moving lower since 1980! Not only that, but there have also been many times since 1980 when rates have risen brutally, in spite of the longer-term trend. In many of those cases, borrowers that failed to lock in early enough in the process were either forced to accept a higher rate or simply never completed the process.
Purchase and Refi Lock Considerations
When we talk about “never completing the process,” this could naturally be a very big problem in some cases. For example, rates can rise quickly enough that many borrowers can no longer qualify for the monthly payment. If they’re not locked, they simply cannot complete the mortgage. In the case of purchases, that could mean they just lost their earnest money deposit--not to mention the opportunity to buy the house they wanted or needed. Even in the case of refinances, failing to complete the mortgage can mean the loss of significant monthly savings or in more dire cases, much-needed cash for any number of purposes.
Because of these potential pitfalls, it’s almost universally wise to heavily consider locking as soon as the monthly payment and lock time frame make sense for your scenario, and to only forego locking if you’re prepared for the increased costs associated with an unforeseen rise in rates. If such a rate rise would jeopardize your qualification for the mortgage or even your willingness to complete it, locking is the only option.
Lock Extensions and Expirations
Despite the best intentions and diligent participation among all parties, some mortgage are destined to run past their initial lock time frame. While there is no universal policy, most lenders are able to extend the lock time frame based on certain conditions. Most of the time, this will involve a predetermined cost, and in many cases, this is simply the difference in cost between your original lock time frame and the next tier. For example, if there was a 0.125% change in the discount points in order to lock for 60 days instead of 45, and assuming you locked for 45 days only to find it wasn’t going to be long enough near the end of the process, extending to the 60 day lock could be as simple as adding the 0.125% to your upfront costs in order to extend the lock for 15 days.
In other cases and depending on the lender, the situation can be far more severe--especially if rates have moved significantly higher since you first locked. It can absolutely be the case that going over the originally agreed-upon lock time frame means that your loan will now have “worst-case” pricing. This means that you have to pay whichever is higher between the original cost of the lock time frame needed to complete the loan or the current market rate. If we’re only talking about something like the 0.125% from the previous example, that’s not a big deal, but if rates had moved significantly higher, that cost increase could easily be over 1.0%--enough to make anyone wish they’d chosen the longer lock window upfront.
Conclusion
In conclusion, locking your mortgage rate is a strategic move that can provide peace of mind during the home buying process. It offers protection against potential market fluctuations, allowing you to secure a definite interest rate for a specified period. However, it's essential to understand the terms, potential fees, and the right timing to make the most of a mortgage rate lock. Always consult with your lender or a financial advisor to make informed decisions tailored to your unique circumstances.
FAQ's
How does locking a mortgage rate work?
When you lock a mortgage rate, you agree to pay a certain interest rate for a set period of time, usually 30 or 120 days. This protects you from market fluctuations, so you won't have to pay more if interest rates rise before you close on your loan.
When should I lock my mortgage rate?
The best time to lock your mortgage rate is when you're ready to start the home buying process. This will give you peace of mind knowing that your interest rate is locked in, even if rates rise before you close on your loan.
How long can I lock my mortgage rate for?
The length of time you can lock your mortgage rate for depends on the lender and the type of loan you're getting. Some lenders offer rate locks for as short as 30 days, while others offer locks for up to 120 days.
What are the fees associated with locking a mortgage rate?
Some lenders charge a fee for locking a mortgage rate. The fee is usually a percentage of the loan amount, and it can range from .25% to 1%.
What are the benefits of locking a mortgage rate?
There are several benefits to locking a mortgage rate, including:
Protection from market fluctuations
Peace of mind
More time to shop for a home
Ability to lock in a lower interest rate
Philip Bennett
Philip is the owner and Licensed Mortgage Broker at Bennett Capital Partners, Bus. NMLS # 2046828. He earned his degree in Accounting and Finance from Binghamton University and holds a Master's Degree in Finance from NOVA Southeastern University. With more than 20 years of experience, Philip has been a leader in the mortgage industry. He has personally originated over $2 billion in residential and commercial mortgages.
Learn more about Philip Bennett's background and experience on our Founder's page. Whether you're a first-time homebuyer or a seasoned real estate investor, our team is here to help you achieve your real estate goals. Don't wait any longer, contact us today and let us help you find the right mortgage for your needs.
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