When looking for a new home, shopping for favorable mortgage rates and terms is important. As any recent homebuyer can confirm, mortgage rates change frequently, and what you see today might not be available next week or month. Unless you get a mortgage rate lock, market rates could significantly increase in the average home closing time. Read on to understand how to secure a mortgage rate lock and simplify homebuying.
What Is a Mortgage Rate Lock?
A rate lock on a mortgage means that the interest rate you receive in an offer won’t change for the lock duration. The most common rate locks are 30 to 60 days, but some lenders offer a mortgage rate lock for up to 90 days. Knowing your rate is locked in gives you time to close on a home without worrying about mortgage interest rate increases. Find more on how to shop for a mortgage.
How Does a Mortgage Rate Lock Work?
A mortgage rate lock helps borrowers secure a specific interest rate. When rates are trending higher, this can prevent you from getting stuck with a higher interest rate. When you get a mortgage rate lock, the lender will offer the best available rate you’ve received.
Timing is important on a mortgage rate lock. When you initially get a mortgage preapproval, it’s too early to get a mortgage rate lock. Some mortgage lenders allow you to lock in a mortgage rate once you have a prospective home. Others might wait until the seller accepts your offer.
To get the most out of a mortgage rate lock, you’ll want to time it to give you time to close on a home while securing the best available interest rate for your situation. You’ll find more guidance on timing your mortgage rate lock below.
A mortgage rate lock typically lasts 30, 45 or 60 days. Sometimes, you could get a rate lock for as little as 15 days or as long as 90 days. If you haven’t closed on the property by the time the mortgage rate lock expires, you could apply for a rate lock extension. If you get a construction loan, rate locks are longer, usually 12 months or more.
Factors to Consider When Considering a Mortgage Rate Lock
When choosing a mortgage rate lock, consider the current market conditions, your financial situation, and the projected closing timeframe. Here are the details of what to consider.
Market Conditions
When looking at a mortgage rate lock, remember that if rates drop, you may have to pay an additional fee to access the lower interest rate. Consider:
- What is the current trend in interest rates?
- Is the market volatile or stable?
- Are interest rates expected to rise or fall soon?
- How does the current market condition affect mortgage rates?
These questions can help determine the relative risk of taking a mortgage rate lock.
Timeframe for Closing
For mortgage rate locks, time can have a major impact. If it takes longer to close on the property, you risk losing the rate lock. Consider:
- How long do you expect it will take to close the loan?
- Is there any risk of delays or potential changes in personal circumstances that could affect the closing timeline?
- Will the rate lock period be sufficient to cover the closing process?
Personal Financial Situation
Finally, your finances will play a role in whether a mortgage rate lock is the right decision. Consider:
- What is your current credit score and financial stability?
- Will your financial situation change significantly in the near future?
- Is there a possibility of qualifying for a better interest rate in the future?
If you can work to pay off debt or raise your credit score within one to two months of closing, you might qualify for a better interest rate without a mortgage rate lock. Find more tips to raise your credit score quickly here.
How to Secure a Mortgage Rate Lock
If you’re ready to secure a mortgage rate lock, it takes just a few steps.
1. Research and Choose a Lender
Do your research and compare offerings and customer reviews to ensure you are working with a reliable and trustworthy lender. You can check customer reviews with the Better Business Bureau (BBB) and whether there were any complaints filed with the Consumer Financial Protection Bureau.
Be sure to also compare interest rates and total fees based on your financial situation and credit score to find the lender that can best meet your needs.
2. Determine the Right Rate and Term
Consider factors such as your budget, how long you plan to stay in the home and your overall financial goals. Loan terms affect the best available interest rate and how much you pay in interest over the loan. You can aim for a target interest rate or total monthly payment with fees. Also check whether the lender will allow you to lower the interest rate if rates drop before you’re ready to close.
3. Gather Necessary Documents
Necessary documents for a mortgage rate lock include proof of income, tax returns, bank statements and employment history. Lenders may also ask for:
- Government-issued ID
- Social Security number verification
- Bank statements for the last two to six months
- Investment account statements
- Tax returns for the last one to two years
- Tax forms like W-2s and 1099s
- Pay stubs
- Credit report — can be pulled with your Social Security number
4 Submit Your Application
When applying, it’s important to follow the lender’s instructions carefully and provide accurate information to avoid delays or complications.
5. Lock in Your Rate
After your application is submitted and reviewed, you will get an offer and have the opportunity to lock in your mortgage rate. Carefully consider the total costs and research market trends to ensure that a mortgage rate lock is your best option. Check your credit score and consider whether you could increase your credit score significantly to secure a lower interest rate at closing.
If you decide to proceed, once the rate is locked in, it’s time to close on the property. This includes working with a title company and real estate lawyer and ensuring that all necessary inspections and appraisals are performed before closing.
Benefits of a Mortgage Rate Lock
Mortgage rate locks have several advantages, although the largest benefit is protection from increasing interest rates.
Protection Against Interest Rate Fluctuations
Interest rates can fluctuate daily or weekly. Because it typically takes nearly two months to close on a home, a rate lock can help borrowers avoid higher rates. For many borrowers, this also offers peace of mind as the daily or weekly interest rate fluctuations during the closing process can create additional worry or stress.
Budgetary Certainty
Once you have a mortgage rate lock, you’ll know exactly how much you need to budget for monthly expenses. A mortgage rate lock helps borrowers plan their finances. You can eliminate rate-related uncertainties and focus on the closing process.
Drawbacks of a Mortgage Rate Lock
While a mortgage rate lock offers a lot of benefits, it’s not without a few potential drawbacks. Here’s what you’ll want to consider.
Potential for Missed Opportunities
When interest rates drop after a lock-in, your available option depends on the lender. In some cases, the lender will allow you to drop the rate once. But in some cases, you could be locked in at a higher rate or have to pay significant fees to secure a lower rate.
If you lock too early, your rate lock might expire before you’re ready to close on the house. Whether you can extend the rate lock depends on the lender’s policies. For that reason, it’s important not to lock too early to reduce the risk of either the rate lock expiring or rates dropping.
Cost implications
Be careful to check cost implications. Some lenders may charge fees for a rate lock. Usually, this is 0.25% to 0.5% of the final loan amount. That comes to $250 to $500 per $100,000 borrowed. Compared to other home purchase costs, this is minimal but should be weighed into your financial planning to determine whether the benefits outweigh the expenses.
Final Tips to Get the Best Available Rates
When you lock your mortgage rate, you have the opportunity to get a lower rate if interest rates increase. If you work to improve your credit score, assuming interest rates don’t increase too much, you could secure a lower interest rate. Remember that after you secure a mortgage, you can refinance if interest rates drop significantly. Find the best refinance rates here.
Frequently Asked Questions
How long does a rate lock last?
The duration of a rate lock varies by lender. You can get mortgage rate locks for 30, 45 or 60 days and sometimes longer.
Can I still get a rate lock if I haven’t found a property yet?
It’s usually better to wait until you’ve found a property to lock a mortgage rate, or you risk the rate lock expiring before closing. Some lenders will allow you to lock the mortgage rate before your offer is accepted.
What happens if interest rates drop after I’ve locked in my rate?
If interest rates drop after you’ve locked in an interest rate, you can ask the lender about a rate float down. You may have to pay an additional fee. You could also seek a new lender, but you might have to pay fees to change lenders after the rate lock.
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About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.