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Mortgage interest rates are fluctuating and unpredictable and can change many times between applying for your loan and paying it off. If you want to avoid uncertainty and want to stick with the interest rate on your mortgage offer, get a mortgage interest rate lock.
Although interest rate locks give borrowers peace of mind, they are not foolproof: after locking in a rate, it's possible to miss out on a lower interest rate, or the loan may not close before the rate lock expires.
What is a fixed mortgage rate?
When you receive your mortgage application, the lender will usually ask you whether you want to fix your interest rate for a set period of time or make it a variable rate. If you choose a fixed rate, your interest rate will stay the same as long as the loan is closed before the fixed period expires.
If you don't want to secure it straight away, your mortgage lender may give you a period of time (such as 30 days) to request a secure, or you may be able to wait until just before closing on the home.
Get multiple mortgage offers to see which lender's mortgage rate offer is best. Once you find the ideal rate that fits your budget, lock in that rate as soon as possible. Closing a loan can take several weeks or even months, and there's no way to reliably predict whether interest rates will go up or down during that time.
Consequences of failing to lock in mortgage interest rate
If you don't lock in your rate, rising interest rates could force you to make a larger down payment or pay points at closing. Paying an upfront fee (or mortgage points) to the lender means you're paying a large amount of money up front to get a lower interest rate.
For example, if you take out a $200,000 loan with a 30-year fixed rate, a rise in interest rates from 5% to 5.5% could increase your costs by more than $60 per month and increase your interest payments by $22,000 over the life of the loan.
“Fixing an interest rate gives consumers certainty regarding the financial terms of the loan, particularly the monthly payment,” says Sebastian Hart, capital markets manager at online homeownership company Better. “Without a rate lock, borrowers don't know the final terms of the loan until the very end of the process.”
How does a mortgage rate lock work?
Locking in a mortgage rate can reduce financial uncertainty during the homebuying process by protecting you from significant interest rate increases.
Interest rate fixes are usually valid for at least one month to give the lender enough time to process your loan. If the lender does not process your loan before the interest rate fix expires, you will have to negotiate an extension of the interest rate fix or accept the current market rate.
It's possible that the market interest rate on your loan may be lower than your fixed rate, but unless you have a “float down” option, you won't be able to take advantage of the lower rate.
Even if your interest rate is fixed, it may change due to factors related to your application, such as:
A new down payment amount, an appraised value for your home that is different from the estimated value listed on your application, a lowered credit score due to missed payments or taking out unrelated loans, or an inability to verify the income listed on your application.
Your interest rate lock-in agreement will include things like the interest rate, the type of loan (e.g., a 30-year fixed-rate mortgage), the lock-in date, the points you'll pay for the loan, etc. Your lender may tell you these terms over the phone, but it's best to get them in writing as well.
What to do if interest rates fall after you have fixed your interest rate
If you locked in your rate early but rates are falling, consider withdrawing your current mortgage application and starting a new one. However, there are some risks to this approach. You might:
Other costs, such as appraisal fees and credit checks, that you have already paid will go to waste and you will have to pay them again on your new loan application. If the lender or mortgage broker has high fees, it will cost you more to process your new application. Home delivery will be delayed, which can complicate your home buying plans if the seller needs the transaction to close on an exact date. This is less of an issue when refinancing.
However, if there's a big difference between the new rate and your current fixed rate, it may be worth withdrawing your loan application and paying a few hundred dollars to get an interest rate that will save you thousands over the life of the loan.
Today's mortgage rates
When can you fix your mortgage interest rate?
The most common time to lock in your mortgage interest rate is when you accept your loan application.
“When applying for a mortgage, customers typically discuss interest rates and terms up front with their mortgage banker,” says Tom Parish, head of consumer lending products at BMO Harris Bank. “If a mortgage rate is attractive to customers, many of them lock it in as soon as they apply because they don't want to take on the risk of interest rates rising.”
If you're getting the best possible rate and fear interest rates will rise, lock in now. But if you're prepared to gamble that rates will fall in the coming days or weeks, your lender may allow you to wait and lock in at a later date. Make sure you ask your lender whether you can lock in at a later date and what restrictions this entails.
How long does a mortgage interest rate lock last?
Rate lock periods are typically between 30 and 60 days, but when discussing rate lock periods with your lender, you should take into account how long it takes to close a loan in the area you live in. For example, if lenders are experiencing a high backlog of mortgage applications because interest rates are historically low, choose the longest term possible.
Also, when discussing mortgage rate lock-in with your lender, ask whether they will prioritise applying for a new buy to let mortgage over a refinance – and if so, make sure you have a long enough fix-in period to cover the mortgage application process.
You will need to promptly submit any documents requested by your lender to proceed with your mortgage application, including:
Bank account statement Proof of income Income tax return Photo ID
If you respond late, your interest rate lock-in period may expire before you have signed your mortgage. In that case, your lender may ask you to pay an extension fee to lock in your interest rate or spread the cost across multiple accounts. In some cases, the lender may be liable and you may have to pay the full cost.
Should you take advantage of a mortgage rate “float down”?
A “float down” on your mortgage rate can increase your chances of getting the lowest interest rate before you close the deal. If your loan rate is locked in and goes down during the application process, a float down allows you to change to a lower rate.
Before locking in an interest rate, you should ask your lender about this option to understand the rules and potential costs that apply. For example, a lender's policy may require your interest rate to drop by a certain percentage before making the change, may charge a fee for moving to a new rate, or may condition your loan approval on additional documentation that you may be required to submit.
“Each lender has its own float-down policies and qualification criteria,” Hart says. “Typically, a float-down occurs when a benchmark interest rate drops significantly between the date a borrower locks in their rate and the closing date.”
If you have plenty of time before closing and the loan application is fairly straightforward, the float-down option may be the best fit.
Mortgage interest rate fixing fee
There may be a fee to lock in an interest rate on a mortgage, but many lenders offer it for free. The fee may represent a very small percentage of the loan (for example, 0.025%, which amounts to a few hundred dollars on a $300,000 mortgage), but the cost can be offset by the savings you make by getting a loan at a lower interest rate.
The cost also varies depending on the length of the lock.
“It's in the consumer's best interest to ask about any fees a lender may charge and where to check before applying,” Hart says.
How much does it cost to extend your mortgage rate fix?
Rate lock-in extension fees vary by lender and term. Fees can range from 0.125% to around 1% of the mortgage amount.
The shorter the extension, the lower the fee: for example, 0.125% to 0.25% for interest rate locks of 180 days or less. For terms closer to a year, you may be charged a fee of at least 1%.
Benefits of fixed mortgage interest rates
If you're happy with your current interest rate, you can keep it unless your loan is modified or the lock expires before you close. Because your rate is fixed, you don't have to worry about your monthly payments changing. If interest rates rise and you need to make a larger down payment or buy points, you can avoid being caught out at the last moment before closing.
Disadvantages of fixed mortgage interest rates
You could miss out on a lower interest rate, potentially saving you thousands of dollars over the life of your loan. When your rate lock-in expires, you could be charged hundreds of dollars to extend it, or miss out on interest altogether.
Should I lock in my mortgage interest rate?
Locking in a mortgage interest rate is generally worthwhile if interest rates are trending upwards and you want to avoid paying a higher interest rate at closing. Locking in a rate can also be useful for construction loans that take several months to complete and are subject to construction delays.
Forbes Advisor mortgage writer Josh Patoka contributed to this article.
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Check rates with Better Mortgage today.
Frequently Asked Questions (FAQ)
How does a 6-month mortgage rate lock work?
A six-month rate lock means your lender locks in your current interest rate for 180 days. Before you decide to fix your mortgage rate for six months, check with your lender to see if they offer a float-down option. Because interest rates can fluctuate significantly over a six-month period, a float-down option allows you to close at a lower rate if interest rates fall during that period. Float-down options usually come with a fee.
How do I get out of a locked-in mortgage rate?
Mortgage interest rate locks are usually non-cancellable. Even if interest rates fall, you're stuck with the fixed rate unless you switch lenders or end the fixed period. That said, some lenders offer a float-down option that allows them to lower their interest rate to current market levels if interest rates fall.
Some lenders also offer an interest rate match guarantee if a competitor offers a better rate on similar loan terms, but to qualify, you must submit the better offer within three business days of the original rate lock-in date.
Lenders may also release interest rate locks if any of the following changes occur:
Credit score Income Property value Desired loan amount Down payment
Is it better to lock in a mortgage interest rate?
Locking in a mortgage can be useful if market interest rates are likely to rise before the settlement date or if you want to know the interest rate early in the underwriting process to estimate your monthly payments. Long-term construction projects can also benefit from locking in an interest rate.
Can I change the loan amount after I have fixed the interest rate?
Yes, but if you change your desired loan amount or down payment, your mortgage interest rate could increase because you are adjusting one of the factors that determine your initial fixed interest rate.
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