You may have heard of the term “lock your rate” as your going through the home buying process, but what exactly does it mean and what happens when you lock a rate?
What Does It Mean to Lock a Rate?
Locking in a rate when you are talking about a mortgage loan is referring to the way that you can “lock-in” an interest rate, and it will not change between the time that you make your offer and the moment that you close. This only applies so long as you close in the specified time frame and nothing changes in your application. When you do not lock in your interest rate, this is referred to as “floating” a rate, and it is a strategy that may be helpful if you know that interest rates are dropping. However, not locking in can be devastating if interest rates are rising.
The reason that people do this is because interest rates for mortgages are constantly changing. They shift from day to day but they can even change from one hour to the next. However, when you lock in your rate, that rate will not change. It can be very beneficial if you want to take advantage of a particularly low rate. That said, there are downsides to locking in your rate as well. For instance, you may find yourself missing out on an even lower rate if rates drop after you lock in. You may also have to pay an additional sum if you have to extend the length of your locked rate. To avoid this, you’ll want to speak with your lender to make sure that the length of your rate lock covers the time it will take to close on your loan.
There are lenders who will offer a rate lock when they issue you a loan estimate, but this is not always the case. You will want to check the first page of your loan estimate to see if your rate is, in fact, locked and for how long the lock is in place.
Your rate lock is not guaranteed if things change. There are several reasons that your rate may change such as if the amount that you are asking for changes, your credit score fluctuates, or your income shifts.
When Can I Lock in a Rate?
Each lender is different when it comes to locking in a rate. Some lenders will allow the borrower a locked rate once the borrower is pre-approved for a prospective home. However, there are other lenders who will want to wait until the seller has accepted the buyer’s offer.
You’ll want to make sure that you time your rate lock properly. After all, if you get your rate locked in too early, you may end up going past the expiration date. At that point, you may have to pay extension fees just to keep your rate or you may have to accept whatever interest rate is available at that point. Of course, your lender still may void your rate lock earlier than your expiration date if your credit score changes or items on your mortgage application shift between the time of your agreement and the final underwriting.
How Long Can It Remain Locked?
The typical rate lock will go for at least 30 days, but they can also be offered for 15 days and 45 days. You can ask your lender about what rates they can offer you for different rate periods. For instance, you may be able to get a better rate for shorter periods than for longer periods. Once you go past 60 days of a rate lock, locking in rates can get more expensive. In those instances, you may want to wait until you are closer to your closing.
If you do have to extend your rate lock, you can likely do so for anywhere from 90 days to eight months. This is especially helpful if you a construction loan. In fact, with a construction loan, you may find that the eight-month rate lock saves you money in the long run if the interest rates begin to rise.
Looking for a Correspondent Lender in Washington D.C.?
Finding the right lender is a critical part of the home buying process. Without a proper lender at your side, you could find yourself with higher interest rates and unfavorable terms on your mortgage. In a market that is always fluctuating, this is not something that you can afford. Thankfully, you have Gregg Busch. As a top correspondent lender in Washington D.C., Gregg Busch understands the market, and he can advise you on how to lock in your rates, for long you should lock in your rates, when would be the best time to do so, and how to make sure you get the best rates to begin with. If you are interested in learning more about what The Busch Team can do for you in your home search, contact us at The Busch Team today.