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Landing a good interest rate can be a tricky part of buying a home and getting a mortgage. In certain cases, a mortgage rate lock may help you. The lock is an agreement between the borrower and bank that secures a specific mortgage or refinance rate for a set period, protecting the homebuyer from market fluctuations. 

In this article, we’ll explain how mortgage rate locks work and provide some guidance on how buyers can effectively utilize them. 

Understanding Mortgage Rate Locks

• Definition: A mortgage rate lock is the process of locking in a specific interest rate for a mortgage between the offer and the closing to protect it from market fluctuations, according to the Consumer Financial Protection Bureau. Usually, a rate is able to be locked for a period between 30 to 120 days. In that period, the lender will guarantee to honor the agreed-upon rate. 
• Purpose: Rate locks allow for stability and predictability when considering mortgage costs, even if rates in the marketplace increase before closing. This saves borrowers the stress of having to watch for daily rate changes. 

How mortgage rates are determined

• Market Factors: Several factors influence how mortgage rates are determined. Economic indicators play a large role, with data points such as GDP growth, employment rates, inflation, Federal Reserve policies, and other nationwide economic shifts coming into play. Federal Reserve policies can adjust the federal funds rate, which will have a direct effect on mortgage interest rates and impact how much borrowers will end up spending. 
• Lender Discretion: Lenders and banks establish their mortgage rates based on market conditions, such as economic trends, inflation and Fed policies. But they also take into account a borrower’s financial status and qualifications, looking at their credit score, income, and debt-to-income ratio. This helps lenders manage risk and protect their investment. Keep in mind that more stringent standards may apply to non-conforming mortgages, such as jumbo mortgages.

How Mortgage Rate Locks Work

Mortgage rate locks give you a specific time period to close on your loan and preserve the  rate you locked in. You’ll want to make sure you understand the timeframe of the lock, any fees involved, and when the option may be right for you. 

Timing and duration:

• Rate Lock Period: Typically, rate lock periods are 30, 45, 60, or 120 days. Longer periods will usually offer more time to complete the closing process, but the trade-off may be higher fees. Shorter locks can have lower fees but require moving more quickly toward closing.
• Locking in Rates: Once you decide to opt for a rate lock, contact your lender to see if they’ll agree to one. You can then determine the interest rate and lock period and receive written confirmation of the terms and agreement.

Rate lock fees and options

• Fees: Rate lock fees might be charged upfront or included in the mortgage closing costs. The amount of the fees can vary based on the length of the period and the lender; longer periods typically cost more. Additional fees may be added when extending the rate lock beyond the agreed period.

Floating vs. Fixed Rate Lock: Fixed rate locks secure one interest rate for a specific period, but there is another option as well, although it may cost an additional fee. A floating rate lock works like a fixed rate lock, but the borrower can request a rate reduction if market rates fall before the lock period ends. Just keep in mind lenders may have different rules and fee amounts if they offer a floating rate lock.

When to Consider a Mortgage Rate Lock

Knowing when to seek a mortgage rate lock is key to getting the most economic benefit from this option. 

Pre-approval stage

• Timing: During the pre-approval stage of a mortgage, you can begin to consider a rate lock, which will secure a competitive rate. Determine if the lender allows mortgage rate locks, as well.
• Market Conditions: Keep an eye on market conditions, such as changing economic factors and moves by the Federal Reserve, to decide if current market trends match your financial needs. 

Purchase agreement signed

• Commitment Period: The commitment period will be set after the purchase agreement is signed. The lock will be held for this period, though extensions are an option for a fee.
• Rate Lock Expiration: Letting the lock rate period expire means the buyer could miss out on a favorable interest rate and be subject to market fluctuations. 

Steps to Utilize a Mortgage Rate Lock Effectively

Knowing how to use your mortgage rate lock effectively will save you time, stress, and money down the road. 

Understand lender policies

• Rate Lock Agreement: Knowing what terms and policies your lender will put on the mortgage rate lock is an important step to managing the process properly. 
• Rate Float Option: You can also consider the option to “float down” the rate. The float-down option lets you hold an available rate while leaving the option to reduce it if rates fall during the lock period. You can usually only use this once, and it’s often used for new construction projects or longer-term rate locks. 

Monitor market trends

• Economic Indicators: Keep your eye on economic news and indicators, such as market fluctuations and inflation rates, to catch any developments that may affect mortgage rates. 
• Rate Lock Extension: An extension may be an option: it can prolong the lock period if the loan process is taking longer than expected, keeping the agreed-on rate in place. 

Finalize loan approval

• Documentation: To avoid a delay in closing, make sure to gather all your required documents ahead of time. These can include documents about your finances or income and may help the lender give you approval faster. 
• Rate Lock Confirmation: For clarity and assurance, confirm the locked rate with the lender in writing.

Benefits of Using a Mortgage Rate Lock

Why use a mortgage rate lock? It may help save you anxiety over an up-and-down market and allow for some stability as you work toward the closing process. 

Financial security

• Budgeting Certainty: Locking in a rate can help provide peace of mind, allowing borrowers to know how much their mortgage payments will be so they can budget accordingly before closing. 
• Planning: The rate lock may also facilitate better financial planning and budgeting for the other expenses involved with home ownership, such as insurance, repairs, and legal fees, because once you know your rate and potential monthly payment, it can help you budget other expenses around this cost to help keep your finances on track.

Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.

Published by Liana P.