10 Rate Lock Questions Explained
A rate lock occurs at some point during the loan process. Typically, we encourage a rate lock towards the beginning of the process. A rate lock protects and makes sure your interest rate options are frozen for a certain period of time. The goal is to have certainty of what your exact costs will be at closing. The rate environment changes every day and rates can sometimes even change multiple times per day. A rate lock protects the borrower from any rate environment changes during the lock. If rates were to go up after you locked in, your rate and payment would stay the same.
When can you lock in a rate?
With most lenders, you can lock a rate once you have a full mortgage loan application, meaning you’ve negotiated an accepted offer on your new home. However, many loan programs might offer a ‘lock and shop’ program. This is where you can lock your rate in before finding your dream home so you know the exact rate you’ll get during the offer process.
How long does a rate lock last?
The most typical rate locks last for 30, 45, and 60 days. For example, if you have a closing date on your new home that is 40 days away, you’d likely choose the 45 day rate lock with your loan officer to ensure that your rate lock doesn’t expire before closing. There are some other options that are 3, 4, 6, and 9 months long offered for new construction products, however these can typically be quite expensive. The longer your rate lock is, typically your terms are slightly less advantage. For example, if you’re locking in a 4.500% rate on a 30 day rate lock, the lender discount points might be $1000. However, on a 60 day lock, it might be $1500. This is because the lender is setting money aside for you at today’s markets rates for a longer period of time.
How do you lock in your rate?
Your loan officer should be discussing a good time to rate lock with you during the process. Loan officers don’t need a borrower’s permission to lock in rates, but it’s best practice to have a conversation between the buyer and loan officer. A borrower can simply ask their loan officer to lock in their rate. Although paperwork will be sent to you after your rate is locked as a legal requirement, no paperwork is needed on your end. It can be as simple as a 30 second phone call or email.
What is a ‘float down’?
When a borrower drops their rate after the rate is locked, that’s a float down. With that being said, a few things need to happen for a float down to occur. Policies vary from lender to lender, but generally a drop of about .25% in rate will cause this to happen. In a 30 day closing, this is very rare. There is also typically a small fee added to the cost of the rate to do this because you’re cancelling your old lock.
How much does a rate lock cost?
Typically, a 30-90 rate lock costs nothing out of pocket. The same goes if you lock a rate and end up paying cash for the home. For longer term longs (4 months and longer), there is typically an upfront nonrefundable deposit towards closing costs. This is because the lender is setting aside money for a long time at today’s market rates. That being said, the true cost of a rate lock is that a rate at 4.500% might cost $1000 in discount points for a 30 day rate lock, $1250 for a 45 day rate lock, or $1500 for a 60 day rate lock. So at closing, the longer the rate lock, the more fees there are. However, if you lock in your rate for 60 days and then all of a sudden rates go up – your old 60 day rate lock is likely cheaper than the 30 day rate locks that day (hence, the benefit of locking in your rate)
What happens when the rate lock period expires?
With a good lender, this shouldn’t happen. However, things don’t always go according to plan. Let’s say you had a rate lock for 30 days on a home, but the inspection negotiations took a little longer than usual and there were delays with the appraisal. Now it’s day 31, but your lock wasn’t extended, so your lock expires. If your lock expires, then typically you’ll have to lock with a brand new lock. Most lenders will give you worst-case pricing, meaning whichever day was worse – the day you locked, or the day you re-locked, sometimes with a small fee added.
Can I extend the lock if I need to?
It depends on the loan and lender, but typically you can extend your lock, although it’ll most likely cost you. A typical fee to extend is 2-3 basis points (or .01% of the loan amount) per day. So if you have a $250,000 loan, this could mean $50-$75 in additional fees for every day late. This is why choosing the correct mortgage rate lock length to start is important.
Can I change my loan program, terms, and rate after I lock my rate?
In almost every situation, the answer is yes if it’s with the same lender. Let’s say you’re switching from 5% down to 20% down. That’ll impact your loan amount and potentially your rate as well. The nice thing is that you basically have frozen all options with that lender on that day. If you decide you want to pay extra discount points to ‘buy down’ the rate so your payments are lower, you can decide to do that as well. Now there is a point where you can’t make these changes anymore close to closing – however, once you lock in the rate, you can often make these adjustments as long as you’re at least 1-2 weeks before closing.
Should I lock in my rate?
Locking in your rate eliminates risk and simplifies the process. Unless you’re more than 3 months out from buying a home, locking in earlier is usually your best option. There are a few things that can happen after locking in a rate:
- Rates move up a little or a lot — You’ve made a great decision!
- Rates move down slightly — You’re stuck, but have the peace of mind knowing your rate can’t change.
- And if the rates move down significantly — Typically you still have the float down option mentioned above.
The good news is that you don’t have to know all of this yourself. That’s why you’ve got me!