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How a mortgage rate lock helps homebuyers

Buying a new home is exciting. When you find the home of your dreams, you don't want anything to get in the way of your ability to afford it. The housing market is always changing in subtle ways, and these changes can affect your pending mortgage.

When mortgage rates fluctuate, your monthly payments and the total cost of your loan can change with it. A mortgage rate lock can protect you from rate changes that occur before closing.

What is a mortgage rate lock?

A mortgage rate lock is an agreement between you and your lender to temporarily lock your interest rate for a specific period of time, typically 30 to 90 days. You may be able to get an extension when needed, but there may be an additional fee. If interest rates go up between the time you lock in your rate and closing day, you'll still get the lower rate.

Your mortgage rate determines the yearly amount of interest you pay on your loan, and it’s expressed as a percentage.. Mortgage rates fluctuate frequently, which means the percentage your lender quotes when you apply for  the loan could change before you close. While this might not seem like a big deal, changing your interest rate can significantly impact your monthly payments. When you find an affordable mortgage rate, you can ask your lender for a mortgage rate lock so you can keep the rate you’re comfortable with.

How a mortgage rate lock works

The mortgage process can take some time. From the time you apply for a mortgage until closing day, mortgage rates could change many times so buyers need a way to protect themselves.

Lenders have different rules regarding mortgage rate locks and when you can get one. Depending on your lender, you may be able to get a rate lock immediately after applying. Some lenders require a seller to accept your offer before you're able to lock in a mortgage rate. The most difficult part could be deciding when to lock in your rate.

How a mortgage rate lock impacts your mortgage

It's important to remember that your mortgage rate determines your monthly payment amount. This means a small change could have a big impact.

For example, if you get a 30 year mortgage with a 4% interest rate for a $300,000 home and make a 20% down payment, a quarter-point (0.25) rise in interest will increase your payments over $35 a month. Not only can this impact your monthly spending habits, it adds up over time. Locking in a  rate can affect almost everything about your mortgage, including:

  • Down payment: If you don’t lock in your mortgage rate and rates rise, you may need to come up with a larger down payment or purchase discount points during closing to decrease your interest rate to maintain your original monthly payment.
  • Monthly payments: A rate increase automatically increases your monthly payments. Securing a rate lock ensures your rate won’t change between when you lock it and when you close.
  • The total cost of your loan: Locking in a rate could save you money over the life of your loan. If you didn’t lock a rate, and they go up before you close, you’ll end up paying more in interest over the life of your loan.

When to lock in your rate

Often, buyers keep an eye on rates to determine when they should move forward with a lock. If rates are rising or falling, it's important to weigh the benefits against the risks of locking in early or waiting until closer to closing. Here are some factors to consider:

  • Locking in early: If mortgage rates are low, locking in early may be a good idea. The biggest risk of locking in your mortgage rate early is that your rate lock could expire before you close. Contact your lender before this happens to see what your options are.
  • Timing the market: As you monitor mortgage rates, you may notice trends that provide clues to rising or falling rates. To find the best combination of interest rates, mortgage terms and costs, consider the rates for different rate lock periods. Many lenders offer the same rate for 15 day and 45 day rate locks. If you need to lock your rate for a longer period of time, you may end up paying more.

3 factors that could change or void the terms of your mortgage rate lock

A mortgage rate lock is a guarantee for both the buyer and lender that an agreed-upon mortgage rate won't change for a specific amount of time. There are certain stipulations that make this agreement work. Changes to your application details or agreed-upon exclusions could change the terms of your mortgage rate lock. Those changes include:

  1. Float down provisions: A rate lock means you won't be subject to rising rates. It also means you can't take advantage of falling rates. If your rate lock includes a float down provision and rates fall within a specific period after your loan is approved, you get the lower rate. If rates go up, you won't be impacted.
  2. Application changes: If your income changes or other important details are altered, your rate lock could be voided. This could include changes to your credit score, employment or even the property appraisal.
  3. Changes to the loan: Under certain circumstances, you may wish to make changes to the terms of your loan. Keep in mind that changes affecting the length or type of your loan could also void your mortgage rate lock.

Should I lock in my mortgage rate today?

The housing market is always fluctuating, and the terms of each mortgage can vary widely. The best way to determine when to lock in your mortgage rate is to consider your unique financial situation and the terms of your mortgage. Ask yourself these questions to decide if it's time to get a mortgage rate lock.

  • Are you happy with the rate and your resulting fees and monthly payments?
  • Could higher rates jeopardize your loan?
  • How much time do you have before closing?
  • Are mortgage rates trending in your favor?
  • How much could you save if rates go down?

It's impossible to predict mortgage rate changes with complete accuracy. The best time to lock in your interest rate is when you can comfortably afford the monthly payments and other terms of your loan.

How to get a mortgage rate lock

When your loan is approved, your lender may offer a rate lock before submitting the agreement to underwriting. If your lender doesn't offer a rate lock, ask for one. Talk to your lender about your options so you can decide the best time to lock in your mortgage rate. When you discuss your options for mortgage rates, make sure to ask about available rate lock periods and fees.

Speak to a Home Lending Advisor to learn more about the details of mortgage rate locks and how you can lock in a rate.

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