Mortgage rates change a lot. They can move up or down throughout the day. They can be subject to many things, from the Federal Reserve (The Fed) announcing a rate increase to events occurring in the US or worldwide. You may have a conversation with your loan officer today only to learn that the rate you discussed has gone up or, if you are lucky, has gone down! Getting a rate lock is the only way to ensure your rate will not change.
Mortgage rates affect your monthly payment, so it is important to know what your rate will be so you are sure you can still afford your payments. Here are some things you should know about mortgage rate locks.
What is a mortgage rate lock?
A rate lock agreement guarantees that the rate you are given for your loan will be the same at closing, regardless of what the market may do. Locking your rate is a good idea if you are the kind of person that doesn’t like to gamble. If you lock your rate before closing, that is one less thing to worry about. If the interest rates increase during your lock period, you get to keep your rate.
However, if you lock your rate and they go down, you won’t be able to get the lower rate unless your rate lock includes a float-down option. There is a charge for the float-down option. Discussing that with your loan officer as you begin the process would be the best course of action.
When should you lock your rate?
If you have gotten a rate that you feel is affordable, you should lock your rate as soon as possible. However, if you want to risk it, you must be prepared for the possibility of a higher rate, especially in the current market, as rates can change significantly from day to day.
Some standard periods for rate locks are; 15, 30, 45, and 60 days. Mortgage Equity Partners has a program called “Lock to Shop” that protects our borrowers from market rate increases as they shop for a home. Our borrowers can get a fully underwritten loan commitment to use as they shop for a home, and if the rates drop during the home search, they will have a one-time option to modify the rate. The difference between the rate they have and the rate they want must be lower than .25%.
What happens if your rate expires?
In today’s competitive market, it would not be unusual if the rate-lock period expires while you are still looking for a home. Your options would be to pay to extend the rate-lock or take on the current rate. You should discuss the rate-lock strategy with your loan officer as you begin your home search.
One of the best ways to ensure your rate doesn’t expire as you go through the loan process after making an offer on a home is to stay up to date with all the requests for documentation from the loan officer and their team. A successfully processed mortgage requires coordination with many different parties. If you fail to submit your required documentation promptly, the process can take longer than expected, jeopardizing your rate.
A rate lock provides security. It isn’t easy to time the market perfectly to meet your needs. Discuss this process with your loan officer to see what makes sense. Turning your mortgage process into a game of trying to get the best rate is risky, so it is an individual decision.