What Is a Mortgage Price Lock?
Are you about to buy a home? If this is the case, or if you are planning on buying a home in the near future, it is worth brushing up on how the mortgage rate lock process works. This process gives you control over what your mortgage loan interest rate will be and can help you make clear decisions about the home buying process.
A mortgage interest lock allows you to set the interest rate you want for a period of time instead of dealing with market changes while you wait for your loan to close. Interest rate locking is a common practice and most lenders offer it to borrowers during the loan process.
By setting your tariff, you will be able to take advantage of the lowest tariff you have without worrying about losing it due to market fluctuations. This gives you time to close your loan without worrying about paying more interest than necessary.
What is a Mortgage Interest Freeze?
Mortgage rates adjust to the macro economy and the stock market as the demand and supply of money available for lending change constantly. Lenders make the decision to approve you for a particular interest rate based on the information they have at the time, but they know you need to make decisions based on the number you get.
[ See: How Much House Can I Afford? ]
As a result, some lenders even offer or auto-create a mortgage rate lock, where you get your interest rate – for example, a 3.75% interest rate – for 30 or 60 days, regardless of how interest rates fluctuate after that.
If interest rates go down after locking, the lender has a small advantage. If it goes up, you get the benefit, but either way, you both benefit from knowing your rate.
How does a mortgage interest lock work?
A mortgage lock is not really free. There is usually a fee that is included in the total price you get, which is usually noted in the fine print. They can ask if your interest rate would be different without an auto lock, and your lender can tell you if the interest lock is standard for them or if there are other options.
For example, if you are offered a 3.75% blocked plan for 30 days and the deal is delayed beyond that, you will need to adjust the plan or pay to renew. When your rate lock offer is about to expire, there is a decision you need to make: would you like to try extending it and possibly adding a small renewal fee to your total loan cost? Has the market changed in your favor, now allowing an interest rate of 3.5% or less? In this case, it would be better if you let your plan expire and get a better plan.
There are some elements of interest freeze that you may want to think about early in the process. For example, is the market as a whole fluctuating or has interest rates risen or fallen sharply? This information cannot predict the future, but it can help you decide whether tariff blocking makes sense for you.
You can also inquire about a tariff block with an optional one-time float down. This is the ability to lower your tariff once during lockdown if tariffs fall. You’ll likely have to pay a fee for this, but it could be worth the money if you’re worried about setting an interest rate that turns out to be too high.
How do I lock in a mortgage rate?
During your first meeting with your lender, you should ask about the lender’s guidelines for setting mortgage rates. This should include asking about the costs involved, how long the lender will rate an interest rate, and what the cost of renewals if your close is delayed.
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If you have decided to work with the lender, you will receive in writing the terms and conditions for your interest rate, whether you have an optional float-down and what the costs of extending the interest freeze period are. When you are happy with your mortgage rate, try to get to the close quickly to avoid renewal costs.
Once you have your rate set, unless you have the option to float down, it might be better to guess your rate. If the rates are going down at this point, you don’t want to beat yourself up for locking your rate when it was higher. Refinancing is an option in the future if interest rates drop so far that it’s worth it.
When should I set a mortgage rate?
Once you have an accepted offer on a home, you need to make the decision whether or not to lock your interest rate. Until then, you will not be able to lock up an interest rate in most loan situations. While no one can tell you exactly what will happen to the mortgage rates, you can look at the latest trends your lender or other financial professional can help you find and track. A lender may suggest that a lock is a good idea, but you also need to weigh your own factors.
Make the decision to block your plan based on:
- How confident you are that the closing will go as planned
- How long is a lock you’re looking at – the longer the lock, the more expensive it can get
- Whether interest rates are currently rising; Rates that are trending down make it more attractive to wait
For example, if interest rates have been at all-time lows in the past few months and are starting to rise, you should set an interest rate early as they have plenty of room to increase.
If you know that the close is scheduled in 15 days, and there are no red flags in sight, and you find that interest rates have gone down today, it might be a good day to set your lending rate. The closer you get to closing, the cheaper the lock becomes, as the market has less time to change and take profits from your lender.
Too long, not read?
With a mortgage lock, you and your lender can avoid the stress of interest rate fluctuations and instead create fixed-numbered mortgage plans. Your blocking costs depend on how long you want to block your plan. However, if the market is constantly fluctuating, those additional costs might be worth the money so as not to get stuck with a much higher tariff. Pay attention to the mortgage rates, pay attention when you see a low interest rate, and when the interest rates reach their optimal point, commit to the fixed rate.
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