A rate lock is basically an agreement between the mortgage loan applicant and the mortgage lender on a certain interest rate for a specific period of time. This means that the borrower is protected from rising interest rates while processing the loan application.
A mortgage borrower can only lock in a mortgage rate for a specific time let’s say 30 to 60 days, and the lender is guaranteed to lock in the rate during this period. If the time expires while the borrower has not finished processing the loan, then the lender is no longer guaranteed to lock in the mortgage rates.
What happens when rates fluctuate?
When you agree on a certain rate with your mortgage lender, you are required to sign a rate lock agreement. After signing the agreement, if interest rates rise while you are still in your lock in period this does not affect you. However, it also means that if interest rates go down during the lock in period you cannot take advantage of the low rates.
This does not mean that you cannot change your lock in rate during your lock in period. You still can but this usually comes at an extra fee. Ensure that you get the lowest mortgage rate before signing a rate lock agreement.
When is the best time to lock in your rate?
It is advisable to first sign a purchase agreement on the property you want before locking a mortgage rate. Do not be in a hurry to lock in the rates. You can first shop around for the lowest mortgage rate before locking in the final rates. Since the lock in period usually lasts between 30 to 60 days, ask your lender the approximate time they expect to finish processing your loan.
When you have a time line, you can ask the lender to lock in your mortgage rate for that period of time to protect yourself from rising interest rates. If your loan processing time takes longer than the rate lock in period, then that means you are no longer guaranteed your desired mortgage rate. Ensure that you lock in your mortgage rate in writing.
Can you choose a longer rate lock in period?
As you read above, normally a lock in period lasts between 30 to 60 days. However, you can ask for an extended lock in period to cover any delays that my happen during your loan processing. This however may cost you a bit more to have an extended lock in period. Another disadvantage of having a longer lock in period is that you may not get good interest rates as with a shorter lock in period. Talk to your lender and let them explain all the options you have before you make your final lock in period decision.
The bottom line: Be decisive!
It is definitely wise to line up a number of mortgage rates options before zeroing in on one. Do not be in a hurry to sign a mortgage rate lock in agreement if you are not sure about the rates available. You need to do a thorough research on the market trends to be able to predict correctly whether interest rates are likely to go up or down. When you feel you have an interest rate that you are ok with, then you need to make a decision to lock it in. Sometimes people end up locking higher mortgage rates just because they took too long to make a decision.
If you are not sure how to go about locking in a mortgage interest, look for a reputable lender to help you understand the process well and advise you on when to lock in a mortgage rate.