The best mortgage rate, however, isn’t the only consideration you’ll want to keep in mind. Sometimes the best price on a loan isn’t always the best rate on a loan.
Can the lender work with my credit? Can they work around my schedule? Will they communicate with me effectively on important variables such as locking my interest rate?
Since your home is usually the largest investment you’ll ever make, it’s important to understand how rate locks work.
WHAT IS A RATE LOCK?
A mortgage rate lock, also known as a lock-in, is the lender’s commitment to hold a certain interest rate, at a certain number of points, for a specified period of time. The specified time is meant to cover the period of time it takes while your loan application is being processed and you’re preparing to close on your home.
Mortgage rate locks are expressed in days, typically in 15-day increments. The two most common rate lock periods are 30 days and 60 days.
Rate locks for longer periods of time are available, but upfront fees will typically be required.
THE IMPORTANCE OF LOCKING IN YOUR RATE
It’s essential to lock your rate in because the market is always changing and rates can go up quickly and easily, sometimes several times in one day.
Rate locks protect borrowers from rate fluctuations for the duration of the rate lock period.
Should the market rise after the interest rate is locked, the lower rate will still be honored. The downside however, is that should interest rates fall after the rate is locked, the borrower may not be able to take advantage of lower rates.
Pay close attention to deadlines. The benefits of a low rate are only as good as the term of the rate lock.
HOW MORTGAGE POINTS WORK
The price for a mortgage loan is often expressed as “points” paid to obtain a specific interest rate.
There are generally two types of points – origination points and discount points.
Origination points are ultimately fees paid by you to the mortgage lender for obtaining the loan. Anywhere from zero to one percent of the loan amount is generally charged as a loan origination fee.
Discount points allow you to buy down your interest rate. Your lender can show you the breakdown of the prepaid costs vs the long term savings of paying points. Depending on your situation, paying points may be a good move for you.
Points are essentially prepaid interest. The more points you pay, the lower the interest rate. One point equals one percent of the loan amount.
5 IMPORTANT THINGS TO KNOW ABOUT RATE LOCKS
- You should always request something in writing indicating your rate has been locked. Don’t rely on oral agreements.
- Some rate lock-in offers have fine print that doesn’t always work in your favor. Be sure to read over any offers carefully.
- Find out when you can lock in your interest rate. Some lenders will allow you to lock prior to completing your loan application. Others will not allow you to lock until after your loan application paperwork has been completed. There are some lenders that won’t allow you to lock until after your loan has been approved by underwriting. Understand your lender’s policies.
- Be sure to know whether or not there’s a charge to lock in your interest rate. If there is a charge, find out exactly what the charge is and what it gets you. Most lenders won’t charge to lock your rate unless your rate lock exceeds a certain amount of time.
- For how long is your rate lock valid? Lock-in agreements can range from 7 days to 120 days, with 30 day locks being the most common. Be sure to check that your lock-in agreement will still be valid when the time comes to close on your loan. Find out who covers any costs to extend the rate lock should you not close on time.
UNDERSTANDING MORTGAGE RATE LOCKS
Every borrower will ultimately need a rate lock in order to close on their loan. For that reason, whether you’re buying or refinancing a home, you’ll want to get the best rate lock possible.
Take advantage of today’s low rates and lock in a rate while interest rates are still at historic lows.