When you apply for a mortgage, you’re quoted an interest rate. But it’s possible for that rate to change by the time you sign your home loan. If you want to avoid that risk, you can take advantage of a rate lock, which commits the lender to giving you the original interest rate.
WHAT IS A RATE LOCK?
A rate lock, also known as a lock-in, is an agreement between borrower and lender that guarantees a fixed interest rate on a mortgage, provided that a loan is closed in a specified time period, typically 30 to 60 days. A rate lock may also specify the number of points you’ll pay.
Lock in a rate when you see the one you want — this can be when you first apply for the loan, or later in the process — and make sure it’s for a long enough term to allow you to finish submitting paperwork and get approved. (Although you can lock in a rate at any time, it’s generally smarter to wait until you have a purchase agreement in place.)
Rate lock prevents your interest rate from rising, but it can also keeping it from going down too! Look for loans that offer a “float down” policy, in which your rate can fall with the market, but not rise.
HOW MUCH DOES A RATE LOCK COST?
Rate lock fees can take many forms: They could be a percentage of your mortgage amount, a flat one-time fee, or simply figured into your interest rate. Rate locks of fewer than 60 days, for example, will run you at least a couple hundred bucks or up to 0.5% of the total loan amount. The longer you lock your rate past 60 days, the more you’ll pay.
WHAT ARE THE DIFFERENT KINDS OF RATE LOCKS?
Among the different types of agreements:
Locked rate, locked points: Neither the interest rate nor the number of points paid upfront may change.
Locked rate, floating points: The lender must offer you the same interest rate but can charge you a different number of points (an upfront fee expressed as a percentage of the loan), so you may pay more at closing.
Floating rate, floating points: You can lock in your rate and points at some time after the application but before settlement.
SHOULD YOU LOCK IN YOUR RATE?
A rate lock is basically a hedge: You’re worried that a higher interest rate would put your mortgage out of reach, so you’re willing to pay money upfront to prevent this from happening. Remember that rate locks operate under the same principle as insurance. Most people will lose money, but it may be worth it if an increased interest rate would be catastrophic for you.
IF YOU WANT A RATE LOCK, READ THE FINE PRINT
If you decide to go the rate-lock route, make sure you cover your bases.
Get it in writing. Get a blank copy of the agreement to see whether you’ll be charged if your application is denied, whether you’ll be able to take advantage of lower market rates or whether your points can change.
Get it done, and fast. As much as possible, try to get your loan approved within the rate period. This means providing the lender with relevant documentation — including W-2s, the purchase contract for the house, and debt information — as soon as possible. If you don’t close within the lock period, your rate may rise with the market. Lenders sometimes offer a rate lock extension for a fee.
Be ready to commit. If you aren’t sure you want to buy the house for which you’re getting the mortgage, a rate lock probably isn’t a good idea. Finding a willing seller can take a while, and there’s no guarantee that you’ll be able to close the sale before the lock period ends.
SUDDENLY, A NEW INTEREST
When you’re serious about buying a home, all of a sudden you’ll notice interest rates — probably more than you ever have before. And with good reason: Your mortgage payment, and the amount of interest you pay over the life of the loan, directly impacts the wealth you’ll build during your peak earning years. Little changes in rates, amplified over a long period of time, make a big difference.