Few lender options award today’s homebuyers with a greater opportunity to protect their financial interests than rate locking. With the ability to lock in an interest rate, prospective buyers may simultaneously mitigate the risk of higher mortgage payments and protect their buying power. That said, it’s not nearly enough to simply lock in an interest rate without minding due diligence or gaining an understanding of the pros and cons of the entire process. As with any other financial endeavor, borrowers must first learn the weight of the impending decision before committing to a locked in rate.
A rate lock is an agreement made on behalf of a lender and a prospective borrower; one that guarantees a specific interest rate on an impending loan. As the name suggests, a rate lock literally locks in the rate the borrower can expect to pay over a predetermined amount of time. The rate is typically locked in at the prevailing market interest rate, and isn’t subjected to inevitable fluctuations in future rates. That way, borrowers may lock into a rate they are comfortable with — without having to worry about any future increases.
Rate locks are even more important when placed in the same context of purchasing a home. Buying a house can take a long time, which leaves plenty of room for rates to change over the course of the approval process. As a means of negating the potential changes that may occur over the course of the closing process, rate locks can guarantee a borrower receives a certain rate. Likewise, lenders may secure a future client without risking losing them to another institution; they are a win-win for everyone involved.
Rate locks have served as an incredibly valuable tool for prospective buyers, as they are essentially a way to protect against higher interest rates. Having said that, rate locks take their names seriously; they lock in an agreed-upon rate. While the rate the buyer may expect to pay can’t go up, it can’t go down either. The rate lock will prevent the borrower from benefiting from any sort of decrease in future rates. It is worth noting, however, that a locked in rate may be changed under the right circumstances. Rate locking may be voided if any information on a respective application is changed, like a property appraisal, credit score, or even the loss of a job. The resulting changes may render the locked rate moot. Additionally, some lenders award borrowers a one-time ‘float down’ rate, which grants borrowers the opportunity to adjust their locked rate if mortgages rates dip.
Rate lock availability will vary from lender to lender, which means some borrowers will be allowed to lock their rates sooner than others. However, it is common for most rates to be locked sometime between the initial loan application approval and when it is submitted for underwriting.
Mortgage rate lock fees, or lack thereof, are entirely dependent on the mortgage provider. Select mortgage providers may offer borrowers the ability to lock their rate in for free. However, it is common for many lenders to charge a fee to lock an interest rate. More often than not, the institutions who charge a fee will incorporate it into the rate being offered. The fee cost will also depend on the lender, as they vary widely across the industry. The lender will consider the duration and terms of the loan when coming up with a fee, as well as the length of time the rate is expected to be locked for.
It is safe to say the benefits of a locked rate outweigh the potential risks. Locking in an interest rate has less to do with securing the best deal possible, and more to do with protecting one’s home buying power. Those who shop around for competitive rates and lenders are locking in a rate to prevent any subsequent increases in their mortgage payments. Locking in a rate not only prevents buyers from paying more out of their pockets each month (thousands of dollars over the course of a year), but also may allow some buyers to either get a bigger home or come in under budget. Likewise, the fees associated with a locked in rate often pale in comparison to the amount it will save buyers in the long run.
Rate locking is widely considered a relatively safe practice. Nonetheless, there are still risks buyers must be aware of before they consider locking in their own rate. Most notably, it’s entirely possible for interest rates to drop. In the event rates drop, the borrower has agreed to pay the higher, previously agreed upon rate. If the contract doesn’t include a float-down rate option, the borrower will need to abide by the contract and pay the higher rate. Therefore, trying to decide when to lock in a rate isn’t about trying to predict the market, but rather agreeing to a rate you are already comfortable with. Waiting for a lower rate could actually backfire, so it is best to lock in a rate you are already comfortable paying.
Rate locking has proven to be a valuable practice for savvy buyers. The ability to lock in an interest rate before the underwriting process has begun can very easily protect a buyer’s buying power in an environment where rates are expected to increase. That said, locked in mortgage rate rules can be strict, and are subject to contractual obligations that could end up working against the borrower in the wrong circumstances. As a result, prospective buyers need to consider each and every possibility before following through with a rate lock. The more buyers know about locked in rates, the more prepared they will be to make an informed decision when the time comes.