How to Lock Your Mortgage Rate
On average, it takes 45 days for a mortgage lender to process an application from a home buyer or owner who is refinancing. Interest rates can rise and fall quickly for reasons usually impossible to anticipate.
If you are waiting on a mortgage approval, you may wind up paying a higher interest rate than the rate that was in effect the day you applied.
Even a small increase in your interest rate can be expensive. On a $300,000 30-yr fixed rate mortgage at 4 percent, an increase of just two basis points, to 4.2 percent, would increase monthly payments from $1,779 to $1,814, and the total cost of your mortgage would rise by $21,000.
To help prevent the extra expenditure, you can protect yourself with a rate lock.
A rate lock ensures you will not get stuck with a mortgage rate higher than the one you agreed to when your loan was approved. Rate locks cover a specific period, usually 30 or 60 days, and cost a small percentage of your loan total, perhaps 0.25 to 0.50 percent of the total loan. A rate lock on a $300,000 mortgage at 0.25 percent would cost $600. Should your closing be delayed past the end of your rate lock term, you can usually get an extension for a modest additional fee.
“Float-down” Rate Locks Cost More
When your rate lock expires, or you close and your mortgage rate is the same as when you purchased your rate lock, you lose only the cost of the rate lock.
A standard rate lock will not help you should your rate fall below the level that it was when you bought the rate lock. Some borrowers walk away from the mortgage when rates go down if they have enough time to apply for a new loan. To discourage “lock jumping,” some lenders charge a non-refundable fee that borrowers lose when they walk, but many do not.
Some lenders offer rate protection whether your rate rises or falls. They might offer a “float-down” option. A float-down rate lock provides the same upside protection as a standard rate lock, plus an option to reduce the rate should market rates decline. Because a float-down costs lenders more, they charge more than for a standard rate lock.
Is a Rate Lock a Good Idea for You?
Trying to predict future mortgage rates is never easy, even for the experts. Most leading housing economists forecasted rates to be higher in the first quarter of 2019 than they were in late 2018, and they are all wrong. After reaching nearly 5 percent in early November, rates on a 30-year fixed rate mortgage fell to 4.35 percent by the end of February.
Borrowers who purchased standard rate locks recently protected themselves against the rising rates that all the experts foresaw, but missed the opportunity of getting a significantly lower rate.
Historically speaking, today’s rates are very low. In several years, you might be content with your rate compared to what will be available at that time. On the other hand, a $600 fee will pay for itself in a couple of years even if you take out a rate lock and it saves you just $35 a month.
A word of advice: make sure you understand the specific terms of a rate lock contract. Some may measure rates by standards other than Freddie Mac’s weekly Primary Mortgage Market Survey®, so read the terms of your lender’s policy carefully.