- 1-What is a Rate Lock?
A rate lock is a guarantee from a mortgage lender that they will give a mortgage loan applicant a certain interest rate, at a certain price, for a specific time period. The price for a mortgage loan is typically expressed as “points” paid to obtain a specific interest rate. (Points are basically prepaid interest, so the more points you pay, the lower the interest rate). 1 point equals 1 percent of the loan amount. A rate lock protects the borrower from rising interest rates: So, if the borrower locks in a rate of 4 percent, he will only have to pay 4 percent interest even if rates rise while he’s going through the loan application process. Usually, a rate lock is good for 30, 45 or 60 days, though that time period can be shorter or longer; once that period expires, the borrower is no longer guaranteed the locked-in rate unless the lender agrees to extend it. Make sure you and your loan officer discuss your rate lock, agree on when to lock and have a plan for closing before the lock expiration date. Once you lock the rate, it cannot be unlocked
- 2-What happens if the Rate goes up or down after Rates are locked?
If interest rates rise during your lock-in period, you will not be impacted — you will still pay the lower rate that you locked in. If, however, you lock in a rate but then rates drop, you typically will not be able to take advantage of those lower rates; instead, you’ll pay the higher rate that you locked in. There are some exceptions to this: Some lenders have a “rate negotiation policy” which allows them to renegotiate your rate if interest rate drop significantly, usually more than .250% drop. The renegotiation is not free and it can cost up to .50% point (which is .50% of the loan amount).
- 3-When should you Lock in your Rate?
On refinance transactions you can lock in your rate as soon as you find the loan program and the rate that makes sense for your specific situation. If you are purchasing a property, you have to first sign a purchase agreement on a specific property before locking in a mortgage rate.. But before you formalize the rate lock, consider these things: First, you don’t want to lock in the rate too early on, as rate locks are usually only good for between a few weeks to 60 days, so if your loan doesn’t process within that period, your rate lock offer will no longer be good. Therefore, you need to make sure that the duration of your lock-in will give the lender enough time to process the loan. To do that, ask the lender to share the average loan processing time and try to get the lender to lock-in your rate for as long as possible to protect yourself. Floating your rate to see what the market does is usually risky. Interest rates can be volatile . If you want to have the ease of mind that you will get what you were promised upfront the safest policy is to lock your rate.
- 4-Should you choose a longer Rate Period?
All things being equal, consumers should choose a longer rate lock period (these usually range from a few weeks to 60 days) to ensure they can get the agreed upon rate even if there are delays in processing the loan. But there’s a catch: Sometimes if you pick a rate lock with a longer duration (say 90 days) the interest rate won’t be as good as with a shorter duration rate lock period, or the lender may charge a fee for this longer duration. Normally if a loan fails to close within its lock period, the borrower will be charged the “worst case scenario” price for a re-lock (the worst price between the original lock and the current interest rate). Ask your lender to spell out the differences in cost and rates for different duration periods.
- 5-Does it cost money to Lock in your Rate?
Typically, short-term rate locks (those less than 60 days) are free of cost. Some lenders charge more for longer-term rate locks which are more than 60 days. The rate lock fee may be a flat fee, a percentage of the total mortgage amount or added into the interest rate you lock in.