Mortgage Rate Lock-Ins 101

Posted on February 15 By Peter Andrew

If you are looking to purchase or refinance a home, it's important to understand how a mortgage rate lock-in can help you get the most competitive interest rate. In the broadest sense, they are designed to help you save money by locking in a favorable mortgage rate, but some of the details of these agreements can potentially cost you if you are not aware.

Mortgage quotes, mortgage rates and lock-ins

When you get a mortgage quote, it generally shows the rate and points (additional charges) that apply to borrowers that are closing on their loans at that particular moment. But since you almost certainly won't close your loan for a few weeks or months -- and because rates can fluctuate wildly during that time -- it is usually a good idea to "lock in" a favorable rate.

What this means is that, for as long as your lender's rate lock lasts (and they're usually time-limited), you can rely on the calculations you've made about whether you can afford the monthly payments for your new home or refinance. And that's very advantageous, especially if you are already at the limits of qualifying for your new loan because the amount you can afford to borrow is partially determined by the interest rate.

Lock-ins don't always save you money

During periods where the current mortgage rate doesn't rise or fall appreciably, the primary point of locking in a rate is not to save money, but to give you certainty. That may be why, when The New York Times covered this topic last April, it headlined its piece, "Locking in Peace of Mind." You can potentially save thousands of dollars over the life of your loan if rates are rising when your lender gives you a mortgage commitment. But if they suddenly fall instead, don't beat yourself up because nobody in the world can successfully predict short-term interest rate fluctuations.

Common pitfalls to avoid with lock-ins

The Federal Reserve's A Consumer's Guide to Mortgage Lock-Ins details a number of things to watch out for, including these eight:

  1. Try to get your lock-in offer in writing. It's hard to prove an oral agreement.
  2. Some lock-in offers have traps among the small print that are hard to identify. Ask your lender for a blank copy of its lock-in agreement, and have a real-estate professional or lawyer check it.
  3. Find out when your lock-in comes into force: Is it when you apply, when the loan is approved, or when you choose to implement it?
  4. Make sure you know whether you will be charged for your lock-in (and, if so, how much) and what it buys you.
  5. Does your agreement lock in both your mortgage rate and the points or just the rate?
  6. How long is your lock-in valid? Agreements can be anything from seven to 120 days, with 30 or 60 being the most common. Be sure your lock-in agreement will still be good when it comes time to settle -- especially if you've paid for it. Many lenders charge you more to lock in the rate for a longer period.
  7. Make sure you have on hand all the documentation your lender requires to validate your mortgage loan application -- and get it to the lender's office quickly. Your lock-in can expire if there are unnecessary paperwork delays.
  8. Some lenders let you re-lock your particular rate if mortgage rates in general fall. But they often charge for the privilege.

Be clear what your agreement says, and good luck!

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