The Benefits Of A Mortgage Interest Rate Lock
Carla Ayers5 minute-read
August 11, 2022
In the last year, home buyers have watched mortgage interest rates and home values rise and fall like ocean waves. As the market continues to fluctuate, buyers are looking for the perfect time to jump in and purchase their dream home. But with so much uncertainty it might be hard for them to find the calm seas and low interest rates they’re looking for. To help put their mind at ease during the home purchase process, a mortgage rate lock could get them smooth sailing to the closing table.
Read on as we dive into what a mortgage rate lock is and how it can help home buyers get the best possible interest rate in a competitive real estate market.
What is a Mortgage Rate Lock?
Mortgage interest rates rise and fall daily, even hourly in some markets. Because of this, the interest rate given to a borrower when they first apply for a mortgage might not be the going rate when it’s time to close. One way to combat the movement of the market is with a mortgage interest rate lock.
A mortgage rate lock is an agreement between a borrower and their lender that allows the borrower to lock in an interest rate when they want to. Borrowers can monitor interest rates and lock in a rate they can comfortably afford when they are ready. A mortgage interest rate lock will ensure they won’t end up with a higher interest rate when they close.
How Long Does a Rate Lock Last?
Depending on the lender, rate locks are usually good for 30 – 60 days. Once the rate lock expires, the borrower will have the option to accept the current rate or extend the rate lock period. If the transaction is delayed and the borrower needs more time, they can ask their lender for an extension.
If you’re working with a buyer and you see speed bumps in the purchase process (like issues with the home inspection or delays with the seller), mention the need for a potential rate lock extension. Depending on the lender, there could be a fee to extend the agreement. The sooner a borrower speaks with their lender, the better prepared all parties will be for delays.
To help buyers feel more secure from start to finish, our friends at Rocket Mortgage® offer RateShield®. Traditionally, borrowers haven’t been able to lock in interest rates before they sign a purchase agreement. With RateShield home buyers can lock in an interest rate for 90 days. If rates go down while they shop, the borrower can lower their rate one time. If the interest rates increase, the borrower gets to keep the rate they locked in at the beginning of the process.
How Much Does Rate Lock Cost?
Most lenders charge a fee to lock in an interest rate and those fees will vary from lender to lender. A borrower could end up paying somewhere between 0.25% – 0.5% of the loan amount to lock in their rate. It is important that borrowers understand the terms of their loan because a rate lock could be included in the interest rate they’ve been offered.
When To Lock in A Mortgage Rate
If a borrower has received an interest rate that they can afford, its usually a smart move to lock it in. Borrowers who work closely with their lender and prepare for the best- and worst-case scenarios can make educated decisions quickly. In a competitive real estate market, a buyer’s good communication and quick decision-making skills can make all the difference.
If your client decides to watch the rates, let them know Mondays tend to be slower and less volatile, so if rates are already low, it might be a good day to lock in an interest rate. Interest rates tend to fluctuate more in the middle of the week, depending on the market, a borrower may be able to take advantage of a dip midweek.
There is always the possibility that rates will drop. Depending on the borrower’s rate lock agreement, they may be able to withdraw and reapply for a new loan. Keep in mind if they do withdraw, this could significantly increase their purchase timeline.
If your client is struggling to decide how to move forward with fluctuating mortgage interest rates, advise them to reach out to their lender. Encourage them to express their concerns and ask more questions; lenders can often provide peace of mind and good guidance when the process gets overwhelming.
The Pros And Cons Of A Mortgage Rate Lock
Every home purchase is unique and will require specific tools and resources to get the deal done. A mortgage rate lock is a very specific tool that can help buyers in a variety of ways. Below are some pros and cons of a mortgage interest rate lock.
A mortgage rate lock may:
- Protect borrowers from rising interest rates
- Include a float-down option that allows borrowers to lock in a lower rate if rates drop
- Provide peace of mind in an intense competitive real estate market
- Be altered with a refinance later
There are some not so positive things to keep in mind about a mortgage rate lock, below are some cons to consider.
A mortgage rate lock may also:
- Lock a borrower out of falling interest rates if a float down option is not included
- Come with additional fees. Luckily, there are no fees associated with the initial rate lock at Rocket Mortgage. If you need to extend your rate lock, a fee may be incurred.
The Bottom Line
We can’t guarantee calm waters if your buyer clients choose to lock in their mortgage rate. But we know it can be a great life preserver when rates start to fluctuate. A mortgage rate lock can provide security for buyers who need an extra bit of confidence to start making offers. Make sure your client understands all the benefits available to them, like float-down options and rate lock extensions.
It’s hard to keep buyers excited about becoming homeowners when the market isn’t stable. A mortgage rate lock can eliminate that hurdle by giving buyers a rate they can count on.
Learn more about Rocket Mortgage’s RateShield on our Learning Center.