Got a Good Mortgage Rate? Lock It in!

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Got a Good Mortgage Rate? Lock It in!

Every potential homeowner should aim to get the lowest mortgage interest rate possible. You should put a lot of time and effort into looking for the lowest interest rate since lower interest rates translate into cheaper monthly payments. If you do, you’ll probably discover the one with the highest level of competition.

Now for the Bad News

While advertisements may have enticed you with an incredibly cheap mortgage rate, that deal could not be accessible when you close on your mortgage months from now. The “rate quotation” you read in the newspaper or online simply indicates that it is the rate offered at that certain moment in time. Every day, mortgage rates fluctuate, increasing and dropping in ways that are not always simple to predict.

You must use a mortgage rate lock to secure that magic number and ensure that the rate you pay is the best rate available. We’ll demonstrate how using this tool may result in mortgage cost savings for you. You may see the effect of various rates on your monthly payment with a mortgage calculator.

What Is a Rate Lock?

An agreement between a borrower and a lender known as a mortgage rate lock assures the borrower of a set interest rate on a mortgage. Rate locks are crucial since the mortgage application process may be time-consuming and interest rates fluctuate regularly. When you applied for a loan, the rate that was available could not have been the rate that is offered when your loan is authorized weeks later.

Similar to this, the interest rate that was in place when your loan application was accepted could not still be valid when you finalize your home purchase many months later. Borrowers often have the option to lock in a certain interest rate at the moment the loan application is submitted, at some point throughout the loan processing, or after the application has been granted. Policies vary by lender.

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Why Pay to Lock in a Mortgage Rate?

Because interest rates affect both your monthly mortgage payment and the total amount you will pay for the loan over its lifespan, locking in a rate is a crucial step in the mortgage application process. Consider the payments on a $100,000 loan with the following interest rates over 30 years:

RateMonthly PaymentTotal Interest Paid Over 30 Years
4.25%$491.94$77,098.36
4.50%$506.69$82,406.71
4.75%$521.65$87,793.04
5.0%$536.82$93,255.78
5.25%$552.20$98,793.33

A 1% difference in interest rates leads in an extra $60 being paid each month toward the mortgage. Over the course of a 30-year mortgage, it works out to $720 annually and $21,600 overall. Naturally, the extra monthly payment and cumulative interest would be greater if your loan were for a larger sum.

When to Lock

There are many good reasons to fix a rate. Many borrowers try to lock in a rate as soon as they can out of concern that rates may increase. Even while it could seem like a reasonable plan of action, it isn’t always the greatest move to do.

Although borrowers might save money with lower interest rates, locking in a rate is often expensive. A mortgage rate lock deposit may be required by some lenders, while others offer a rate lock in exchange for an interest rate that is marginally higher than the rate in effect at the time the lock is implemented and/or demand that borrowers pay a predetermined number of points in order to get the desired interest rate. Both fixed and floating points are possible. In contrast to floating points, which lock in the interest rate but allow the number of points to guarantee it to fluctuate over time, fixed points refer to a predetermined amount of points.

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There are several lenders who use a tiered approach. Most rate locks are free for periods of 30 days or less. Free locks may be offered for up to 45 days by certain lenders. Fees for longer durations climb gradually, often increasing in step with increases in the lock-in period of 30 days. It will cost more to lock a door for a 120-day period than it would to lock it for a 60-day period. The typical price for a 30-day extension is a quarter-point, however the cost varies greatly depending on the lender.

The guaranteed rate expires and any deposits you made might be lost to the lender if the loan doesn’t complete before the lock-up time is over. You may be out of luck if the expiry date passes as a result of anything you did or did not do, but if the deadline passes as a result of the lender’s activity or inaction, the agreed-upon rate could still be accessible.

Limitations of a Mortgage Rate Lock

While protecting borrowers against increasing interest rates, locking in a fixed rate may also prohibit them from benefiting from declining interest rates. Some lenders have a mortgage rate lock float down option, allowing consumers to choose once to switch from their current rate to a lower one if rates have decreased. Before agreeing to a rate lock, find out whether the lender provides a float down.

It is still possible to wind up paying a higher interest rate than the one you agreed to when you signed for the rate lock, even with a rate lock and a mortgage rate lock float down. This happens as a result of the “cap” that many lenders put in the lock agreement. If interest rates increase before to settlement, the limit allows the guaranteed rate to increase as well. The cap does provide some protection against increasing interest rates since it places a limitation on how much the rate may increase.

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The Bottom Line

Looking for deals while considering a mortgage is a wise move. Examining offers from several lenders might result in considerable savings since rates and fees can vary widely. Make careful to compare prices and to acquire written rate locks. Lenders have every motivation to raise the rate whenever feasible since higher rates imply increased profits.

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