Mortgage rates often change daily, and it takes 30 to 60 days to close on a house, a mortgage rate lock may help you avoid increased interest during the closing period on your new home. Everyone knows that a higher mortgage interest rate means a higher monthly payment and a higher overall payment at the end of the loan’s life. One percentage point increase in a mortgage rate will reduce your purchasing power by 12 percent.
For example, if you borrow $35,000 on a 30-year fixed mortgage at 4.16%, your monthly principal and interest will be $1,703. If the rate increases to 4.25%, the monthly payment only goes up about $20. At 5% your monthly payment goes up nearly $160.
What is a Mortgage Rate Lock?
A mortgage rate lock freezes the rate offered on a mortgage loan for a specific period of time. The lender guarantees that your interest rate won’t change between loan approval and the final closing.
Depending on the lender, your rate can be locked for 30 to 60 days, and some even offer 90 and 120-day locks. The lock-in rate will not change regardless of how rates move in the market.
There is a chance that rates may fall after you’ve locked in your rate. But the odds are the same the rates will increase as well. A mortgage rate lock takes the variable of uncertainty off the table.
When Can I Get a Mortgage Rate Lock?
In many cases, you can get a lock-in rate as soon as you’ve been pre-approved for a mortgage. If you choose to lock your rate that early in the process, you will want to make sure you get at least a 90-day lock to allow time to find a house, make an offer, and get through closing. Some will wait and get a rate lock after signing a purchase agreement.
Understanding Mortgage Rate Lock Policies
Polices will vary by lender. Important things to ask your lender about your lock include:
- Expiration date
- Cost of lock-in rate
- Will the lock-in rate include purchasing discount points?
- What happens if you’re unable to close on the house before the rate expires?
- What happens if market rates rise or fall after you’ve locked in a rate?
- Are there any conditions that would cause your rate to change during the lock-in period?
Most of the time, rate locks will protect you from rates that move in the market. If circumstances change regarding your loan, your lender may adjust your mortgage rate even if you have locked it. Circumstances that can alter a locked rate include:
- A change in the type of mortgage (going from a 15-year to a 30-year for example).
- The home you’re planning to buy appraises higher or lower than expected.
- Your lender is unable to verify sources of your income.
- A significant change to your credit score.
