How To Lock a Mortgage Rate
June 30, 2022
Mortgage rates are a lot like the stock market. They change every day and can be affected by a variety of factors, both big and small. If you’re in the market for a home, you may be wondering how you get an interest rate for a mortgage if it’s constantly changing. This is where mortgage rate locks come in. It’s important to understand how mortgage rate locks work and what you can do to get the best possible rate. So, what is a mortgage rate lock? Keep reading to find out!
The Nature of Mortgage Interest Rates
Mortgage rates can be extremely volatile. They’re affected by a variety of factors and change on a daily basis. The Federal Reserve, economic conditions, inflation, along with supply and demand can all influence the mortgage rate you’ll be offered. On top of these factors, there are personal influences like credit score and financial health that can also change the mortgage rates that are available to you.
Every morning on a weekday (Monday through Friday), banks and lenders get a document informing them of the new mortgage rate for the day. In order to get a mortgage, you have to lock in a mortgage rate with a lender.
How Do Mortgage Rate Locks Work?
What is a Mortgage Rate Lock?
With mortgage rates changing all the time, how do you know what rate you’ll actually get when you go to close on your home? This is where the mortgage rate lock comes in handy. A mortgage rate lock is when a borrower and lender agree upon and hold a specific interest rate until the loan is finalized. Mortgage rate locks were designed to protect both parties from any mortgage rate changes that could occur between the time the loan is agreed upon and when the borrower closes on their property. Whether the rate increases or decreases, your mortgage rate will not change if you are locked in.
How Long Can You Lock in a Mortgage Rate?
Lock-ins for mortgages are done in 15-day increments. Typically, a mortgage rate lock is agreed upon for a 30-day to 90-day period. There can be a fee when locking a mortgage rate and the fees only grow over time. It’s best not to go over a 90-day period without closing the mortgage because the fees only increase the longer the lenders have to hold the rate. 90 days is a threshold for many lenders and afterward, locking in gets a lot more expensive.
Generally, mortgage rates increase by 0.125% every time you add a 15-day increment until you reach 90 days. After 90 days, the lock-in 15-day increments go up to 30-day increments up to 360 days total, or almost a year. However, the mortgage rate increases by a higher amount as well after 90 days and there will be an upfront fee that you have to pay for the lenders holding the lock for a long period of time.
What If You Lock In A Mortgage Rate And The Rate Goes Down?
Unfortunately, if you lock in at a higher rate and the market rates drop afterward, you’re still stuck with the locked-in rate. That’s why it’s important to do your research to understand what the market rates have been before and what they’re like now. That being said, there are avenues you can take to get a lower interest rate after locking in on a mortgage.
1. Refinance The Mortgage
Even though you may have just locked in on a mortgage, you can still refinance the loan in the future if the mortgage rates drop. Typically, home buyers need at least six months of payments and those payments need to be on time with a maximum of one late payment in order to qualify for a refinance so soon. Refinancing allows borrowers to change the terms of their loan including the interest rate. However, refinancing can also be risky because if your financial situation or credit score has changed, you may not be able to get a better mortgage.
Also, as stated before, mortgage rates are tricky to predict. Mortgage rates were as low as 3% for a 30-year FRM just last year. Now they’re approaching 6%.
2. Floating Mortgage Rate Down Option
The second way to get a lower interest rate is to use the float-down option or provision. The float-down option is an agreement with the lender to lock in on a mortgage rate with the contingency that if rates go down before you close on your mortgage, your locked-in rate will lower to the current standards. The float-down provision is beneficial to home buyers because it gives them the chance to get a lower rate if the market changes before closing on a home.
There is a fee with the float-down option. Usually at .5% to 1% of the new total loan amount. There are also requirements in order to use the float-down option. Many lenders require the mortgage rate to be at least a 0.25% change in order to be eligible for the float down.
Changing Lenders After Rate Lock
Sometimes you may lock in on a mortgage with a lender who doesn’t offer the float-down option only to find the mortgage rate to be a lot lower soon after. There is a way to get a lower mortgage rate even though you’re locked in but it requires finding a new lender entirely. You can cancel your mortgage application and start all over again with a different lender. However, there will may be penalty fees that you are forced to pay depending on how much work the lender has put into your mortgage. The earlier you cancel, the better. It’s important to also consider any deadlines and the length of the new mortgage process as it can take 30 to 60 days to get a mortgage approved.
Best Day of the Week to Lock in a Mortgage Rate?
The mortgage rates can change drastically on a daily basis, so it’s important to know when is the best time to lock in on a mortgage. According to The Mortgage Reports, Mondays are the most stable for mortgage rates and have the lowest changes while Wednesdays have the highest changes and are the least stable. Overall, they’ve found that Mondays are the best days to lock in on a mortgage rates and Wednesdays are the worst.
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