For most people, part of the home buying process includes obtaining a mortgage. And that means researching prospective mortgage lenders to find the one that offers you the best deal. This can include the best interest rate, the right mortgage amount, and lower up-front charges, among other aspects. Once you have found the right deal, you then apply to that mortgage lender in the hopes of getting the terms that you want. But without a rate lock, you find out that the terms that you want are no longer available, and your costs will increase!
Unfortunately, this scenario can happen. It occurs because the terms that were quoted to you while shopping for a mortgage were no longer available when it came time to sign on the dotted line. Mortgage lenders can change their rates at any time, but it can be an unpleasant surprise to the borrower.
There is a way to avoid this, and that’s through a mortgage rate lock. Sometimes called a lock in, it is a way that the lender promises to preserve a specific interest rate, and possibly other aspects, for a specified period of time while your loan is being processed. This assures that you are protected against rate increases during your loan application process.
What happens if the interest rate decreases? That depends on your mortgage lender, so make sure you ask before deciding which mortgage lender you want to use. Get all details in writing for future reference.
Your mortgage rate lock isn’t good indefinitely; it usually expires after a set amount of time as defined by the mortgage lender, but typical periods are 30, 45, 60, and 90 days. If your loan has not been processed during this time or you need more time to provide documentation or other details, but your mortgage rate lock expires, you may be subject to increases or changes that are not optimal for you. To avoid this, make sure that you agree on a mortgage rate lock period that will allow for the loan processing to be completed, and that you have provided all required documentation before the start of the lock in period to ensure a smooth and quick loan process. Additionally, ask about typical loan settlement time frames to ensure that your mortgage rate lock is likely to remain valid during the loan process. Also make sure you have some buffer to the period to account for any contingencies.
Note that some mortgage lenders may charge an upfront fee for locking in an interest rate, and may not refund it if you are denied a mortgage, withdraw your application, or if you do not close the loan. However, other mortgage lenders may charge this fee at the time of settlement. Also note that this fee could be a flat rate or a percentage of your mortgage amount. As well, the amount of the fee can change depending on your mortgage lock in period. Ask your mortgage lender about potential fees before you start the loan process so that you are aware of all additional costs related to buying a home.
Who should consider a mortgage rate lock? Anyone seriously considering buying a home and wants to take advantage of a low rate being offered by a mortgage lender. Having a mortgage rate lock lets you predict your monthly expenditures, which will help you formulate your household budget and calculate overall expenses. It also lets you take advantage of any deals so that your expenditures are a minimal as possible.
Keep in mind not that everyone will be able to take advantage of the best posted rates that a mortgage lender has to offer; what you are eligible for depends on the size of your mortgage, your credit score, details of your credit report, your income, and other aspects. But you can still lock in to the best rate that is available to you.
Dreaming about a new home is common for many of us, but it is still a serious financial decision that can have repercussions if not approached correctly. Always do your research, get everything in writing, and don’t be afraid to ask questions to ensure that your dream home becomes a reality.