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Should You Lock Your Mortgage?
As the name suggests, when you lock your mortgage the lender agrees to fix your loan terms, including mortgage rate and lender fees, for the time frame of the lock period. By locking your mortgage rate, you eliminate the risk that your rate increases over the course of processing and closing your mortgage. Depending on market conditions and the length of the lock period, some lenders charge borrowers a higher mortgage rate or fees to lock their loan, although this is not always the case. Borrowers should be sure to understand how locking mortgage rate, and the length of the lock period, impacts their interest rate and fees.
Typical mortgage rate lock periods are for 12, 15, 21, 30, 45 or 60 days. Some lenders also offer rate locks for up to 180 days. Because it is so short, the 12 day lock period is typically provided by the lender free of charge and is utilized when the borrower has satisfied all funding conditions and the mortgage is ready to close. In a declining or static interest rate environment, the borrower will want to utilize the 12 day lock period, or no rate lock at all. This is called "floating" the mortgage.
Rate lock period is also an important consideration when you shop for a mortgage. When you review loan proposals or quotes from different lenders check the length of the rate lock period they use. You want to understand how long the loan terms they are offering are valid for. One lender may be quoting you a 21 day rate lock versus a 45 day lock period offered by another lender. The difference in lock periods makes their loan terms, including mortgage rates and closing costs, less comparable. The quote with the shorter rate lock period holds less weight because you are unlikely to close your loan during the specified time period while the offer with the longer rate lock period offers more certainty but likely a higher mortgage rate too. In an ideal scenario you compare mortgage proposals with similar or the same lock period.
In a rising interest rate environment, borrowers should lock their mortgage for the length of time necessary to process the loan, using a conservative assumption. You should always do diligence at the beginning of the mortgage process to understand how long it takes the lender to process, approve and fund your loan. A typical mortgage takes approximately 30 to 60 days to complete after your loan application has been accepted by the lender although there may be unexpected events or delays that extend the closing timetable. We recommend that you work with your lender to determine how long it will take to close your loan, depending on your individual circumstances. We also advise borrowers to build in an extra cushion in case unforeseen events occur that delay mortgage process.
Be sure that the length of your rate lock period is long enough to process and close your mortgage
Generally speaking, the longer the rate lock period, the higher the mortgage rate, although that is not always the case. Although it may come at a cost to the borrower in terms of a higher rate, the insurance you receive by locking your mortgage, as compared to a potential greater increase in interest rate due to market conditions, can save you thousands of dollars over your loan. Be sure to discuss the interest rate environment as well as the pros and cons of locking your mortgage with your lender at the beginning of the process. Keep in mind that you cannot lock your mortgage until your loan application has been accepted by the lender so you need to complete this step first.
If the time it takes the lender to process your mortgage exceeds the rate lock period it may be possible to ask for a rate lock extension. In a rising interest rate environment a lender may be unwilling to extend your rate lock or may try to charge you an extra rate lock extension fee. This fee is relatively uncommon and should be avoided if possible. Be sure to ask your lender upfront if they charge a rate lock extension fee if your lock period expires before your mortgage closes. If the answer is yes, consider working with a different lender.
Although locking your mortgage is intended to protect you if interest rates increase before your loan closes, what happens if rates decrease during the rate lock period? Many lenders offer borrowers the option to "float down" their locked rate to the lower market interest rate if rates go down during the lock period. "Floating down" enables borrowers to lock-in the lower rate before their mortgage closes. For example, if you locked your interest rate at 4.250% when you applied for your mortgage and rates drop to 4.000% during the rate lock period, you can request to "float down" your rate to 4.000%.
Most lenders apply rules that dictate how and when borrowers can float down their rate during the rate lock period. Lenders typically offer the float down option for free and do not charge borrowers when they elect to float down their rate. Lenders may require a minimum reduction in mortgage rate for borrowers to use the float down option. For example, in some cases the new interest rate must be at least .250% lower than the old rate. So if rates only declined .125%, the borrower may not benefit from the lower rate.
Additionally, most lenders only allow you to float down the rate one time during the rate lock period and limit when you can do it. For example, some lenders only allow you to float down your rate within thirty days of your scheduled closing date or within thirty days of of the expiration date for your rate lock. So if interest rates decline significantly relatively soon after you locked your mortgage, you may have to wait before you can use the float down option. Borrowers should be sure to understand the terms, conditions and potential cost of the float down option before selecting a lender and locking their mortgage.
The table below shows mortgage rates, closing fees and rate lock periods for leading lenders in your area. The lock periods in the table usually range from 30 to 45 days. In some cases, lenders with shorter rate lock periods offer higher interest rates while lenders with longer lock periods offer lower rates. This demonstrates that the rate lock period is only one of many factors that influences loan terms.
While rate lock period is an important consideration when you shop lenders, its primary purpose is to let you know how long the mortgage terms are good for and the lock period should not be the primary reason you select a lender. We recommend that you contact multiple lenders in the table below to compare mortgage proposals and confirm their rate lock period. Shopping lenders and comparing loan quotes is the best way to save money on your mortgage.
Sources
“What's a lock-in or a rate lock on a mortgage?” CFPB. Consumer Financial Protection Bureau, August 4 2017. Web.
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