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A Guide to Understanding Mortgage Rate Locks

Buying a home requires you to weigh a lot of different numbers, from bid price to down payment. One of the most underrated figures is the interest rate on your mortgage.

A small rise in mortgage rates can deliver a severe blow to how much house a buyer can afford. Even a mortgage rate increase from 4% to 4.75% cuts nearly $30,000 from the purchasing power of a homebuyer with a $2,500 monthly housing budget and a 20% down payment, according to data from real estate brokerage Redfin.

When interest rates are rising like they are right now, one way to get more certainty when home-shopping is through a mortgage rate lock. In this article, we’ll explore what governs interest rates and how locking in a rate can help.

Understanding mortgage rates

Mortgage interest rates have risen dramatically over the last year, and are expected to continue increasing in 2019. The average 30-year fixed-rate mortgage was 4.63% as of Dec. 13, 2018, according to Freddie Mac’s weekly Primary Mortgage Market Survey. A year before, the average rate was 3.93%.

Mortgage rates fluctuate from day today and are affected by numerous factors. Rates tend to follow the trajectory of the 10-year Treasury bond yield, or what the U.S. government pays to borrow money. They can also be influenced by the Federal Reserve Bank’s monetary policy decisions and inflation.

Those macro-trends dictate a range of interest rates you might receive. Your specific quote will be determined by the following factors, according to the Consumer Financial Protection Bureau:

  • Your credit scores.
  • Your down payment amount.
  • Your home’s sales price and your loan amount.
  • Your home’s location.
  • Your loan term and type.
  • Your interest rate type, i.e. adjustable or fixed.

Homebuyers who have been nervous about the current rising rates trend might want to consider locking in their mortgage rate as soon as it makes sense to do so.

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What is a mortgage interest rate lock?

A mortgage interest rate lock allows a homebuyer to secure from their lender a specific interest rate on their future mortgage for a predetermined amount of time. Locking in an interest rate means your rate won’t change between the day the lock takes effect and the closing on your mortgage, provided you get it done before the lock expires. Once your lock is in place, you won’t be affected by rate increases, but you won’t be able to take advantage of a drop in rates either.

Rate locks can last anywhere from 15 to 120 days, however, the most common rate lock terms are 30, 45 or 60 days.

What is a rate lock deposit?

Many lenders will include the cost of a rate lock into the interest rate they quote. Others, however, will charge a rate lock deposit. The rate lock deposit is a fee associated with locking in an interest rate and is expressed as a percentage of the loan amount. This deposit varies by lender, so double-check with your loan officer for what it could cost in your situation.

Your rate lock deposit could be anywhere from a quarter percentage point or half percentage point of the loan amount. The deposit is often credited to you at closing, unless you walk away from the agreement.

When it does — and doesn’t — make sense to lock your mortgage rate

Not all homebuyers benefit from a mortgage rate lock. Below we outline the instances when a rate lock does and doesn’t work.

Lock your mortgage rate if:

  • You’re expecting mortgage rates to increase before you close on your house.
  • You know your closing date is more than likely going to happen before your rate lock expires.

Don’t lock your rate if:

  • Your closing date is months away. For example, you’re buying a newly constructed home and it won’t be finished in the coming month or so.
  • You notice that mortgage rates are trending downward and you believe there’s time for you to take advantage of a better rate.
  • You’re having second thoughts about your loan type and want to explore other options.

Can you unlock your mortgage rate?

The operative word in a mortgage rate lock is “lock,” meaning that your interest rate is set for the amount of days specified. You can’t really “unlock” your rate, but there are circumstances that can void your rate lock. Some common reasons your rate can change during a rate lock period, according to the CFPB, are:

  • You changed your down payment amount or loan type.
  • Your home appraisal came in higher or lower than expected.
  • Your credit score changed due to you applying for new credit, making a late payment on existing debt, etc.
  • Your lender couldn’t document some of your income, such as a bonus or overtime pay.

What if your rate lock expires?

A mortgage rate lock only lasts for a set amount of time. If you don’t close on your home within that time frame, you’ll need a rate lock extension, and that will cost you more money — in some cases, up to half a percent of your loan amount.

Rate lock extension terms may come in shorter intervals than some of your standard rate locks, such as 7 or 15 days, though longer extension periods exist. Check with your lender for more information about the fees they charge for rate lock extensions.

What else should you know about rate locks?

Your lender may offer a “float down” option for your rate lock, which means you would be able to snag a lower mortgage rate should rates decrease during your lock period. Keep in mind it’s your responsibility to pay attention to how rates are trending and to request a lower rate with your lender if your rate lock has a float-down feature.

Be sure you thoroughly understand how your lender handles interest rate locks before you ask for one. Work on gathering answers to following questions:

  • If I were to lock in my rate today, what are my options?
  • What time frames do you offer for rate locks?
  • How much does it cost to lock in my interest rate, and how is payment handled?
  • Do you offer rate lock extensions? If so, at what time frames and at what cost?
  • In what instances can my interest rate change during a rate lock period?

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