When you lock in the mortgage rate

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Whether you’re optimistically hoping that mortgage rates will drop or resigned that rates will stay above historic lows in 2021, you may be wondering when it makes sense to sign an agreement with your lender that locks in a certain rate.

We asked two experts for advice: Eric Johnson, a branch manager and mortgage originator in Green Bay, Wis., with Inlanta Mortgage, which is based in Pewaukee, Wis.; and TJ Williams, a regional vice president and real estate consultant in New York City with Wealth Enhancement Group, a registered investment advisor. Both responded via email and their responses were edited.

How does a typical rate lock work?

Williams: Mortgage interest rate locks allow borrowers to lock in a specified interest rate for a specified period of time after the purchase agreement is signed to purchase a home. This helps the borrower in that the expected cost of ownership for the home does not change based on a possible interest rate increase between the time they made the offer or locked the interest rate and the time they close the home. Often, the buyer can lock in the appraisal at any time after they are approved and sign the purchase agreement up to five to 10 days before closing.

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There are two basic types of rate locks. The first is often a built-in 30- or 60-day interest rate lock. During this time, the application is processed, income is verified, inspections are carried out and the lender, seller and borrower work together to close the home. The buyer can often choose when during this process to lock the rate. The other is an “extended interest rate lock.” This is an additional extended lock for a varying period of time (usually an additional 30 to 60 days, but can be extended up to almost a year for new construction) and is used when the borrower believes that the first 30 to 60 days may not be enough time to successfully close at home.

What are the typical costs of locking in a rate for different periods?

Johnson: Most loan programs do not require an upfront cost to lock in an interest rate. When locking an interest rate, borrowers are made aware that the lock confirms their interest rate which has been agreed by both lender and borrower. Longer lock-in periods, such as six-month locks, are more likely to require an upfront fee from the borrower that is forfeited if the borrower does not close with the lender that provided the rate lock. Generally, the difference in interest rate between a 30-day lock and a 75-day lock will be a 0.125 percent higher interest rate for the longer lock period.

Williams: For lenders that do not offer an initial 30- to 60-day rate lock, they may offer a lower rate first and then charge between 0.25 percent to 0.50 percent of the loan amount for the specified rate lock. Generally, the more volatility in the interest rate market, the higher the cost.

The difference in how and when the costs are assessed for an extended interest rate lock, and how much the cost can be, can vary widely from lender to lender and program to program. For example, a lender may consider between 0.05 percent to 0.375 percent of the loan amount to lock in an interest rate in advance.

Why should buyers consider locking in the price?

Johnson: Borrowers should consider locking in their mortgage rate as soon as their purchase offer is accepted. I always recommend a borrower work with a licensed professional to inform them of all available options and when the best time to lock in an interest rate would be.

Williams: A buyer must decide whether the cost of a rate lock or an extended rate lock is really worth the investment by calculating the cost of a loan without a rate lock and comparing the additional increase in interest and the cost of extending the interest rate.

If the borrower cannot afford to risk higher interest rates and they believe there is a possibility of closing delays, there may be reason to investigate an extended rate lock – especially if the buyer is buying at the top of their budget.

When should buyers consider a longer rate lock?

Johnson: Borrowers should consider a long-term interest rate lock when they are in a rising interest rate environment, such as what we are experiencing right now.

Williams: Generally, if a buyer is purchasing new construction where the closing time may be months rather than weeks, or if the buyer has reason to believe there may be longer delays in closing, they should consider a longer rate lock. In times when interest rate increases are evident and sometimes dramatic, a longer time between offer and closing may warrant a longer rate lock.

What happens if a buyer does not lock in the price? Can they lose their loan approval?

Johnson: Not locking in a rate can be a risk in situations where a borrower’s purchase and loan request is close to or at the maximum of what they are qualified to purchase and borrow, and may jeopardize their ability to qualify for the loan. If the interest rate increases, it will push the borrower’s monthly payment higher and may prevent loan approval if other adjustments cannot be made. Borrowers should work closely with a licensed loan officer to review their complete financial situation and to ensure that the loan is set up to help the borrower achieve their financial goals.

Williams: During the mortgage application and underwriting process, if interest rates increase to a point where the lender believes the loan is no longer affordable for the buyer and the interest rate was not locked in, it is possible – and likely – that the lender may withdraw approval of the mortgage.

A buyer and lender should have an open dialogue to know at what rate the buyer may no longer be able to afford the home. A more critical step is to know not only what you as a buyer are approved for, but more importantly, what you can actually afford and be financially sound.

What happens if prices go down during an interest rate lock?

Johnson: An interest rate lock is an obligation from the lender to provide a loan at the rate stated to the borrower. There is also an obligation from the borrower to accept and close at the agreed rate. The borrower is protected if interest rates increase after locking. Unless the borrower has purchased a “floating down” option, the interest rate cannot be reduced if interest rates decrease prior to closing. The term “lock in” confirms that the price has been agreed upon by all parties.

Williams: The availability of a “Float Down Option” varies between lenders and programs, and costs are often between an additional 0.5 percent and 1 percent of the loan amount.

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