If you’re buying a house, you know how many things there are to think about. From location to an agent to financing, you’re making a lot of decisions that will ultimately affect you in the long run.
When it comes to your mortgage, you’re signing on to a long-term commitment to repay money borrowed. And since loan terms can vary from a few to 30 years, there is no way to anticipate market forces or other changes that can impact your mortgage.
However, lenders will often offer the opportunity for you to lock your mortgage rate when applying for a loan, so you aren’t surprised by a rate rise while you’re in the process of finding a home and securing your mortgage. However, rate locks are typically short-term agreements, so you may only have 30 to 60 days to have the loan processed.
Is locking in a mortgage rate right for you? These are some pros and cons to help guide your home buying search.
Talk to prospective lenders about their rate-locking process.
Protection From Rising Rates
The most significant benefit of locking in your mortgage rate is that you are protected from any sudden rate rises that may impact your home search. If you’re counting on a 4% rate that becomes a 4.5% rate, you may need to reconsider how much home you can afford. During the agreed-upon period, you will only be held to the original rate, no matter how much things change before closing. Try and lock in your mortgage on a Monday, as mortgage rates typically trend upward during the week.
Potential Loss Of Lower Rates
The downside of locking in your rate is that if rates drop while you’re waiting to close the loan, you won’t get to take advantage of the new, lower amount. To work around this, you can put a specific clause in your agreement to lock rates that allows you to take advantage of lower rates, but you may need to give up other concessions for the lender to agree.
Locking Too Soon
Since most rate lock agreements are only meant for the short-term, usually around 60 days, if you lock in your rate too early, the agreement may not be valid when it comes time for closing.
You want to be sure that your lender has time to process the loan during the agreement period, so do your due diligence by asking lenders what their average processing time is before signing. However, if your loan doesn’t close in the period and interest rates have changed, your lender may require you to re-lock rates, which can come with a fee.
Most borrowers find that locking in their rates makes sense once they have found a home and have a contract. That way, the clock isn’t ticking on your lock agreement while you’re still looking at properties.
Guarantee that your rate lock lasts through loan processing by initiating it when you’ve found your new home.
Locking Too Long
Some lenders may offer extended rate lock periods beyond 60 days, which sounds like a positive as it gives more than enough time for loan processing. But, the chances of a rate change during a 30-day period are much less than they would be during a 90-day period. What this means is that lenders may charge additional fees for a more prolonged agreement, and may not offer the same terms they would on a shorter one.
The Price Of A Rate Lock
If you’re locking in a rate for the short-term, your lender may not charge anything for the agreement, or will only charge a fee of .25-.50%, typically costing you a few hundred dollars. It’s crucial that you do the math on this charge, if applicable, as it may be more than a rate change would cost. Some lenders may only charge a flat fee, while others may roll fees into your mortgage terms.
It’s always a good idea to get preapproved for a mortgage, so you know what rates and terms lenders will offer you. However, remember not to lock your rates too early so that you don’t need to pay more fees. Get started learning about mortgage options today: Answer a few questions here, and a home lending expert will contact you.