A rate lock is a written agreement that guarantees a borrower a specific interest rate on a mortgage loan as long as the borrower and lender close the loan within a specified period of time. Most often rate locks are for a period of 30-60 days. The rate lock guarantees that a borrower will get a specific interest rate for the life of their fixed rate mortgage. This gives the borrower the confidence to move forward with the loan knowing that their mortgage payment is a specific amount.
The appeal of locking in a rate has recently grown because rates are generally rising. Already, rates are a full point higher than this time a year ago. However, the borrower must be sure that the loan can close within the rate lock period. Borrowers need to be aware of their closing date! All too often a borrower will call a mortgage lender and get a nice low quote for a mortgage rate. The catch is that the borrower may get a quote on a rate that needs to close within 15 days. Not many loans close within 15 days. It’s imperative that the borrower ask the lender the rate, the lock in period and whether there are any points associated with the rate. I’m sure everyone has seen the fine print at the bottom of mortgage ads showing a specific interest rate with 2 points. A point is 1% of your loan amount so on a loan of $300,000, the borrower has to pay an EXTRA $6,000 in closing cost for the 2 points. Buyers BEWARE.
What happens if your rate lock expires because you cannot close by the expiration date? First of all, the longer the lock period then the higher the interest rate or points. Many lenders will lock a rate for 120 days. However, this extended lock period comes at a price. If your rate has expired, you will get the higher of the locked rate or market rate. If you realize that you need more time for closing prior to lock expiration, you can generally extend the rate for a specific period of time for a price. The extension can cost anywhere between .250 points to 1 point depending on the length of the extension.
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Some mortgage lenders allow a “float down” option. You can lock your rate but then you are allowed to re-lock at a lower rate if the mortgage rates decline. However, these float down options either cost money upfront which is lost even if you don’t exercise that option or the beginning rate is higher than the market rate at the start of the process.
Why not just lock your rate with different lenders on different days? That option could get expensive since most lenders require a non-refundable deposit when you lock the rate.
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Borrowers need to ask the lender at what point during the process can the loan be locked, what is the interest rate and are there any points, what is the length of the rate lock, can the Lender close during the period of the rate lock, and what happens if rates drop? An educated borrower will be a happy borrower by avoiding surprises at the closing table.
About the author: Cathy Dyl is a Senior loan officer at Stoneham Bank (NMLS Originator ID # 49343) and has been working in the mortgage industry for over 17 years. You can contact her directly at cdyl@stonehambank.com or learn more about her here
