When you are in the process of closing on your home loan, you will have the opportunity within roughly 30 days of closing to do a mortgage rate lock. There are several important reasons to lock your mortgage rate when buying a home or refinancing your current mortgage:
#1 It Protects You Against Inflation
A mortgage rate lock provides protection from the interest rate going up on your loan before you close. This interest rate lock ensures that your mortgage lender, banker or broker must offer you a specific combination of rate and points.
For those who are paying points for a lower overall rate, a point is a fee that equals one percent of the loan. So, one point on a $200,000 loan is $2,000.
Once the rate is locked in – often for 30 to 60 days – the borrower will still get that rate even if the market rates go up. However, note that if rates drop after you lock in, you probably won’t be able to get the lower rate. If you felt strongly you could request that your loan officer “floats” that rate in case the interest rates fall during your loan process. Of course this is risky because they could rise during the process as well and then your monthly mortgage payment would be higher.
#2 Makes Buying Home Easier in Rising Rate Market
Before rate locks, it was possible to have a loan just about ready to close, but rates spiked due to economic conditions. This caused many home loans to fall through; if rates go up, payments go up on mortgages, and not every buyer will want or will be able to qualify for the higher payment.
When mortgage rates are rising, having a 30 day or 60 day rate lock still allows most people to buy their home.
#3 It’s ‘Free’
Well, nothing is REALLY free, but there is no charge on the closing statement for your rate lock. In reality, the length of your rate lock will affect your interest rate. If you get a short, 15 day lock, you might pay only 1/8 of a point on your mortgage. But if it is a 60 day lock, you could have a full ½ added to your rate.
#4 Locks Can Be Extended
If you have ever done a mortgage loan before, you know that things can and do go wrong. Even if the loan eventually goes through, there could be a delay that extends closing past the rate lock period.
In that case, the rate lock period can be extended, but you may end up having to pay a slightly higher rate.
#5 Rate Lock Ensures Smooth Closing
When you are a few days from closing, locking in the rate makes it much more likely that the loan will close and fund on time. Many experts advise that you have a week between the lock and closing.
The rate should be locked in for a week or so as well because the lender needs to do the closing package, which includes all of the required disclosures and loan documents.
If the rate were floating the day before the closing, the rate could go up, and all of that paperwork must be redone per federal law. And that could delay your closing for another week or more, when rates could rise again.
#6 Peace of Mind
It really all comes down to peace of mind. Getting a mortgage and submitting all of that paperwork is stressful, especially if you really want that particular house. If a loan gets delayed, people can lose their dream home and have to find another one.
A rate lock at least assures you that the rate will not change before closing, which makes it more likely that the closing will happen on time.
That peace of mind is easily worth the slightly higher rate that you are paying for the rate lock.
Here is the Bottom Line
Virtually every mortgage loan officer will recommend that you do a rate lock on your mortgage rate at least a week before closing. Many others will advise you to pay a higher rate or more points for a 30 or 60 day rate lock.
How long of a rate lock to get depends upon market conditions and your personal risk tolerance. If you are in a period of clearly falling or steady interest rates, you can possibly justify letting the rate float closer to closing.
But if rates are generally headed up, it is a smart idea to not risk it and to lock it in for at least 30 days before closing.
There are far too many loan deals that have been scuttled because the interest rate went up too much. In such cases, either the buyer did not want to pay the higher mortgage payment. Or, the mortgage loan underwriter said that the borrower cannot qualify for the higher payment.
Either way, it is a difficult situation that is best avoided. Locking in the rate will give you the best chance that the closing will happen, and you will be in your dream home.