Once you’ve found the home you want to buy, your Mortgage Banker will lock in your mortgage rate
Mortgage interest rates are always changing. Each day, they can fluctuate—sometimes by the slightest amount. But when a lender locks in your mortgage rate, your rate won’t change while your mortgage application is being processed and underwritten, as described in this video (Opens Overlay). If rates go up or down during that time, your mortgage rate will stay the same.
Why it’s important to lock in a rate
No one can predict what will happen with interest rates. If you think rates will go up, or if you don’t want to have to worry about changing rates, it makes sense for you to lock in a rate. Most lenders prefer you lock in a rate once you’re under contract on your new home.
For example, you could lock in a 5% rate for a 30-year term on a $200,000 loan. Your monthly principal and interest (P&I) (Opens Overlay) payment would be $1,073.51. If you decided not to lock in your rate, and rates jumped to 5.5% while your application is being processed, your P&I payment would increase more than $60 per month. You’d end up paying $22,000 more in interest over the life of the 30-year term (see chart at right).
If you think interest rates will go down, you may want to wait to see if you can lock in a lower rate. Although this is uncommon and not recommended, some lenders may let you wait until your application has been fully processed before finalizing your rate. But this means you have to take the available mortgage rate at that time, which could be higher.
What will it cost?
Rate locks can carry a fee, which varies from lender to lender. Your rate-lock charge could be a flat fee, a percentage of the mortgage amount or a fraction of a percentage point added to the interest rate you locked in.
A rate lock fee can also depend on how long you want to lock in the rate. Typically, most lenders offer rate locks for 30, 45, 60 or 90 days. Some lenders, such as Chase, don’t charge a rate lock fee for a standard transaction. However, most lenders would charge a fee if you wanted to lock in a rate long term, such as 180 days while a home is being built. Talk with a Mortgage Banker to discuss rate locks, and what timing and mortgage options would be best for you.
In addition, if you need to extend your rate lock past the initial period (like if your closing date is delayed), you may have to pay a fee for the extension. So, make sure you meet paperwork deadlines and work closely with your real estate agent and Mortgage Banker to avoid delays while processing your loan request.
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