The interest rate of the loan is often one of the most variable factors when buying a home. Rates not only vary from lender to lender, but can also increase and decrease during the period before the loan is finalized. For this reason, locking a mortgage rate can prevent borrowers from losing their desired rate.
What is a rate lock?
The price of the loan is typically expressed as points, with one point equaling one percent of the amount of the loan. The points act as prepaid interest; points are paid for the borrower to obtain a certain mortgage rate.
A mortgage rate lock is a guarantee from the mortgage lender that the borrow can have a specific interest rate for a specific time period and at a specific price. This protects borrowers from rising interest rates; if the borrower locks in a 3.97% interest rate, they can keep this rate even if rates rise during the loan process.
Rate locks are only given for a specific time period, typically 30, 45, or 60 days. After this time the rate lock will expire and borrowers will be subject to the current interest rates; lenders will sometimes extend the rates given during a rate lock after the time allotted has expired.
What does locking in a rate cost?
The cost of locking in on a mortgage rate varies from lender to lender. For some, there is no cost to lock in a mortgage rate. Others may incur a flat fee, while a percentage of the total mortgage amount may also be added to the overall loan. Likewise, some rate lock fees are refundable while others are non-refundable.
Short-term rate locks typically cost between 0.25 and 0.50 percent of the total loan; for most home purchases, this equates to a few hundred dollars. Long-term rate locks, or those longer than 60 days, often cost more or incur additional fees.
What happens if rates change after locking in?
The purpose of a rate lock is to protect borrowers from rising interest rates during the loan process; if rates go up, borrowers can retain the lower rate they locked in. If rates lower, however, there are several courses of action borrowers can take.
Borrowers can ask to include a “float down” clause or provision in their rate lock; this states that if rates lower, the loan can be approved at the lower interest rate. Borrowers can also ask to have the rate lock re-written to reflect the new, lower interest rates. Both of these options, however, may incur additional fees that may or may not equal the savings incurred by the lower interest rate.