Few alternatives for borrowers award homebuyers today with a greater ability to protect their financial interests than rate locking. With the ability to lock into an interest rate, prospective buyers can at the same time mitigate the risk of higher mortgage payments and protect their buying power. That said, simply locking in an interest rate without considering due diligence or gaining an understanding of the pros and cons of the whole process is not enough. As in any other financial undertaking, before committing to a locked-in rate, lenders must first know the weight of the imminent decision.
What Is A Rate Lock?
A rate lock is an arrangement negotiated on behalf of a lender and a prospective borrower; one that guarantees a fixed rate of interest on an imminent loan; As the name suggests, a rate lock essentially locks in over a fixed period of time the rate the borrower may expect to pay for. Usually, the rate is locked in at the current market interest rate and is not subject to future rate fluctuations that are unavoidable. So borrowers can lock in a cost they’re happy with — without thinking about any potential increases.
Rate locks are even more relevant when they are put within the same sense of buying a real estate property. It can take a long time to buy a house which leaves plenty of space for rate increases over the course of the approval process. As a way to offset the possible adjustments that occur during the closing process, rate locks will guarantee that a borrower receives a certain rate. Likewise, lenders can secure a potential customer without running the risk of losing them to another institution; they are a win-win for those concerned.
What Happens If, After You Lock In The Rate, The Rate Goes Up Or Down?
Rate locks have acted as an extremely useful device for potential buyers, because they are effectively a way to defend against higher interest rates. That said, rate locks are taking their names seriously; they are locking in an agreed-upon rate. Although the rate can’t go up, it can’t go down. The rate lock would prevent the borrower from witnessing any kind of decline in future prices. However, it is worth remembering that, under the right conditions, a locked in rate may be adjusted. Rate locking can be invalid if any details on a specific application, such as a property valuation, credit score, or even job loss, is modified. The resulting modifications will make the locked rate moot. In addition, some lenders grant borrowers a one-time ‘float down’ rate which allows borrowers to change their locked rate if mortgage rates dip.
How Soon Can You Lock In A Mortgage Rate?
The availability of the rate lock will vary from lender to lender, meaning some lenders will be able to lock their rates earlier than others. However, sometime between the initial loan application approval and when it is submitted for underwriting, it is common for most rates to be locked off.
Is There A Mortgage Rate Lock Fee?
The mortgage rate lock payments, or their absence, depend entirely on the mortgage provider. Select mortgage lenders may give borrowers the opportunity to lock their rate in free of charge. However, many borrowers are usually charged a fee for locking in an interest rate. More often than not, it will be integrated in the rate provided by the institutions which charge a fee. The amount of the loan will also depend on the lender, as they vary widely across industry. When a fee comes up, the lender must consider the amount and condition of the loan, as well as the period of time the payment is supposed to be locked for.
Advantages of Rate Locking
The benefits of a locked rate outweigh the possible risks. Locking an interest rate has less to do with getting the best possible price, and more to do with protecting the purchasing power of one’s home. Those who search around for good rates and lenders are locking in a deal to prevent any potential rises in their mortgage payments. Locking a rate not only keeps buyers from spending more out of their pockets every month (thousands of dollars over the course of a year), but it may also encourage certain investors to either get a bigger home or come in on budget. Similarly, the costs associated with a locked in contract are always small relative to the amount it would save long-term buyers.
Are There Risks To Rate Locking?
Rate locking is commonly recognized as a relatively secure method. Nonetheless, buyers still have risks to be aware of before considering locking in their own rate. Most notably, lowering of interest rates is entirely possible. In the case of a decline in rates, the borrower has agreed to pay the higher rate previously decided upon. If a float-down rate option is not included in the contract, the borrower would need to abide by the contract and pay the higher one. Therefore, trying to decide when to lock in a rate is not about trying to forecast the demand, but rather about committing to a rate with which you are already at ease it. Waiting for a lower rate could potentially backfire, so locking in a rate you’re already comfortable with paying is the safest way to go.
Rate locking proved a valuable method for clever buyers. Before the underwriting process has begun, the opportunity to lock in an interest rate can very easily preserve buying power of a buyer in an environment where rates are likely to increase. That said, locked in rules on mortgage rates can be rigid and subject to contractual commitments that could end up acting in the wrong circumstances against the borrower. As a result, prospective buyers will weigh any and every possibility before continuing with a rate lock. The more buyers learn about locked in rates, the more prepared they will be when the time comes to make informed decisions.