Homebuying: How to Lock Your Mortgage Interest Rate
Because mortgage interest rates can move up and down throughout a single day, locking your rate can be an important aspect of the mortgage process. A rate lock is a guarantee that your mortgage lender will honor a specific interest rate for a set period.
For example, if your lender locks your rate at 5.25 percent for 60 days and rates jump to 5.50 percent within that period, you will still get your loan at the lesser rate.
It is up to you to seek the rate lock. If you decide not to do so, you will have what is known as a “floating” rate. A floating rate can be a good strategy when interest rates are falling but is not an effective strategy when rates are rising.
What is the lock period?
The lock period usually extends from initial loan approval, through processing and underwriting, to loan closing. However, it can be an extended period for construction loans.
Over the last six months, the average time to close for all mortgages nationally ranged from 48 days for a conventional home loan to 49 days for a refinancing loan, according to ICE Mortgage Technology, a mortgage industry data provider.
At First National Bank, you can lock your interest rate for 30, 45, 60 or 90 days. The longer lock periods, such as the 90-day lock, may be at a slightly higher rate; or you may need to pay an additional fee. The fee is measured in basis points, such as 25 bps, or 0.25% of the total loan value. A 0.25% rate lock fee on a $200,000 loan would be $500.
In most cases, you can lock your interest rate as soon as your initial loan is approved. Once the rate is locked, the loan’s interest rate will not change, barring any changes to your application details.
Rate locks can be voided if the information provided on your application changes, such as the property appraisal, or your income, credit score or employment; or there is a change to the loan itself, such as the type of mortgage loan or term.
When should you lock a mortgage rate?
Because mortgage interest rates are more volatile this year due to decisions by the Federal Reserve to increase rates, there is no way to time interest rates perfectly. You simply do not know what the future holds, no one does. Therefore, do not try to time or outsmart the market, instead, rely on the expertise of your mortgage lender. If they are telling you it is a good time to lock down your rate, trust their guidance.
Is a mortgage rate lock a good financial decision?
An interest rate lock is not about getting the best loan deal, it’s about protecting your home buying power. A rate lock is about preventing your mortgage payment from going up due to rate hikes before your closing. During the period between entering a loan contract and signing the closing documents, it is possible for rates to move a quarter point or more.
If you do not lock in a rate, you may also have to come up with a higher down payment. If your payment increases because of higher interest rates, the bank may require more money upfront to meet its lending requirements.
Locking in your interest rate is a good idea when: you think rates may go up, the rate is affordable, and you want the certainty of a locked mortgage rate.
What happens if the rate lock expires before closing?
Lenders and borrowers want to close loans as fast as possible. First National Bank’s mortgage lenders will do everything in their power to close your loan before your interest rate lock expires.
There are several things you too can do to help speed up the closing process, including starting the loan process as soon as possible by getting pre-approved, providing complete documentation, and responding to your lender’s inquiries quickly. Using First National Bank’s online mortgage process can also speed up the process by leveraging technology to prepare documents and disclosures.
Before you are even under contract on the property, get pre-approved by providing your mortgage lender with your income, asset and credit information. They will pull your credit report, calculate your debt-to-income ratio, and verify your assets available for the down payment. Getting this done in advance saves some time once your offer is accepted and adds to the likelihood your loan will be approved.
If your rate lock expires, your rate will begin to float with daily interest rate changes. Therefore, if your scenario is complex and it may take additional time, it is a good idea to talk to your lender well before your lock expires to ensure the loan stays on track to close in time.
- construction loan
- first-time homebuyer
- home buying
- home equity loan
- interest rates
- mortgage loan