What Is a Rate Lock?
If you like the way interest rates are looking right now, you might want to consider a rate lock. A mortgage rate lock is a guarantee that your lender will give you a certain interest rate on your home loan, as long as your mortgage closes by an agreed-upon date.
In addition to guaranteeing a specific interest rate, a rate lock can also “lock in” points, which are fees that you can pay to your lender upfront in order to obtain a reduced interest rate on your mortgage.
How Long Do Rate Locks Last?
While rate lock periods can vary depending on your specific lender, rate locks typically last 30, 45, or 60 days. However, some lenders offer rate locks as long as 150 days! But don’t get too excited, since the longer period you want to lock your loan for, the higher the cost will be. Since lenders don’t know which way the market will swing, it’s somewhat risky for them to offer rate locks over longer periods of time. For example, if interest rates were to skyrocket during your lock period, a lender could lose serious cash.
How Much Do Rate Locks Cost?
Many lenders offer free rate locks for shorter periods, including those under 30 - 60 days, while for lenders that do charge, a 60-day rate lock typically costs between 0.25 - 0.50% of the total loan amount. In contrast, longer rate locks, such as a 90-day lock, could cost 0.75% of the total loan amount. In case you forgot, these are also referred to as points (i.e .75% of the total loan amount would be 0.75 points).
When Exactly Should You Lock Your Rate?
Most experts suggest that you should work backward from your estimated closing date to determine a good time to lock your rate, and how long of a rate lock you should purchase. Too short a lock, and it’ll stop before you closing finishes -- and too long, and you might be wasting money for time you don’t need.
However, it’s a good idea to give yourself a little wiggle room. For example, if you think you’re going to close in around 40 days, it could be smart to get a 45-day rate lock.
If you run into setbacks, and can’t close during the lock period, many lenders will help you extend your rate lock for a fee, often around 0.125% for a 7-day rate extension, or 0.25% for a 15-day rate extension. This may or may not be a good idea, depending on how rates are looking at the moment.
What If Mortgage Rates Fall During My Lock Period?
If mortgage rates fall significantly during your lock period, you may be able to take advantage of something called a “float-down option,” a one-time opportunity to adjust your rates back to the current interest rate offering. This may or may not cost extra money. If your lender does not have a float-down option, you might want to simply consider renegotiating with your lender to see if they’ll give you a better option. If your lender simply won’t work with you, you can always go elsewhere, but you’ll often have to pay a cancellation fee to do so.