A “mortgage rate lock” is essential to ensure you actually receive the interest rate you are quoted by a bank or mortgage broker. Often times you will you be presented with a mortgage rate quote, but it means very little until it’s actually secured, or “locked,” by a bank or lender.
When you lock in a mortgage rate, you are guaranteed that interest rate, assuming your loan actually qualifies under said lender or bank’s guidelines. By locking a loan, you secure a specific interest rate along with certain terms, including the mortgage index and margin the program is tied to, the prepayment penalty if any, and the initial, periodic, and lifetime caps.
Rate Lock Period
When you lock your loan, you must also choose a rate lock period, which can range from 7 days to 90 days or even longer. The most common lock term is anywhere from 15-45 days, which is the average time it takes for a loan to close.
It’s important to pick the appropriate length of time to ensure you get the loan closed before the lock expires, without subjecting yourself to additional fees.
Either way, you will always have the opportunity to extend your rate lock at a relatively small cost if the process gets delayed, which it often will!
When to Lock Your Mortgage
Some borrowers may choose to lock in a mortgage rate at the initial time of the loan application, before the loan is even submitted to the underwriting department. This is known as a “pre-lock,” and ensures the interest rate is set before the loan is even underwritten.
It can be helpful to pre-lock your mortgage rate if the debt-to-income ratio is close to the maximum, so if there are any interest rate fluctuations, the DTI won’t be exceeded. In may also be a smart move if mortgage rates are rock-bottom and there is little expectation for rates to improve further.
Others may float their mortgage rate and lock their mortgage at the last minute, effectively gambling on the hopes of mortgage rates improving later in the loan process. If you feel mortgage rates have more room to fall, this could be the way to go. But as mentioned, it’s a gamble and there’s no guarantee.
What If My Rate Lock Expires Before Closing?
As mentioned, mortgage locks don’t last forever, they come with a set time period. Assuming you lock your rate in early on, there’s a chance the rate lock period could be exhausted, at which point the lock could expire.
If the rate expires before loan closing, you’ll need to get it re-locked. This could entail worst-case pricing (assuming mortgage rates have risen) and a relock fee. For example, if rates went down, you’d be stuck with your old, higher rate and a relock fee to boot.
Ask for a Rate Lock Extension
But typically the lender will keep an eye on the rate lock period and issue a “rate lock extension” before the lock actually expires. Doing so will ensure you get to keep the rate you originally signed up for.
However, rate lock extensions don’t come for free either. If it wasn’t the lender’s fault, the cost of the rate lock extension could run you several hundred dollars or more, depending on the associated loan amount.
It is calculated as a percentage of the loan amount. So you might be charged .125% for a 7-day lock extension, or .25% for a 15-day extension. These fees will vary from lender to lender and could be more or less.
The higher your loan amount, the higher the cost. On a $200,000 loan amount, you’d be looking at a cost of $250 or $500 to extend the lock period, respectively.
While that fee sounds like a raw deal, holding onto a rate that is an .125% or more lower could save you a lot of money over the term of the loan. In other words, it’s better to get the extension than let the lock expire for fear the rate could rise.
If the delay happens to be the lender’s fault, they will generally offer a free rate lock extension for seven days out of good faith. This should be enough to get the loan closed without any cost to you. Even if it is your fault, you might be able to get a few free days to ensure the loan closes before the lock expires.
In any case, you can try to negotiate a lock extension in your favor, and ask them to extend it for free if you feel it was out of your hands. They may work with you to retain your business and avoid you going elsewhere.
Get the Mortgage Lock in Writing
Either way, it’s important to stay on top of your mortgage rate lock, and to make sure you have the rate and terms in writing. Never just assume a mortgage broker or bank has locked your interest rate.
They may say your rate is this or that, or that it’s locked, but in actuality they may be floating your rate in the hopes of getting a better commission or yield spread premium. Or perhaps you’ve been misquoted, and they’re praying the mortgage rate will come down to what they originally quoted you.
I’ve seen that happen a million times. Brokers will go into panic mode if they failed to lock a rate initially, often after quoting their borrower a guaranteed rate. They’ll call the mortgage lender each day to see how mortgage rates have moved, and nervously push on day after day, waiting for the moment rates fall to the level they were originally quoted.
Sometimes brokers will settle for a lower rate with less commission to them, but often they’ll simply tell the borrower the rate is higher for some reason. And the borrower will just have to accept it because they’ve spent so much time working on the loan that they’ll just want to get it done.
Watch Out for Changes
Some loan officers and brokers may even change the original terms they quoted you to get a lower rate. Such as raising the margin, adding a prepayment penalty, or changing indexes, caps, or even loan programs.
All that said, make sure you know exactly what you’re getting when it comes to the interest rate and terms associated with your mortgage rate lock. Any mistakes here will lead to higher monthly mortgage payments for years to come, and a major headache if you fail to jump on a good rate early on.
Sure, you can gamble, but if you’re happy with a certain interest rate, might as well not take chances. And again, always get your lock confirmation in writing from the bank or broker before you proceed with the deal! This cannot be stressed enough!