Mortgage Rate Locks – What You Need to Know in 2022

“To Lock Or Not To Lock”- may not be the age-old question…but definitely a relevant topic as we close out the 3rd quarter of 2022.

Currently, rates are trending up, so it is a perfect time to find out how you can benefit from locking your mortgage rate. Here is what we will be covering today:

  • What is a mortgage rate lock?
  • What is the cost to lock a mortgage rate?
  • Do rate locks work differently on a home purchase or refinance?
  • When is the best time to lock in a rate?
  • Is there a difference between locking a mortgage rate with a bank or a broker?
  • What if I change my mind once I’ve locked my rate?

Locking a rate seems like a small, insignificant step in the loan process. At times, it may be, but there is a ton of stuff most people don’t know about rate locks. Well, that won’t be you after you read our detailed guide to rate locks. In fact, you will probably be able to school a new loan officer in the business after reading this.

What is a mortgage rate lock?

A mortgage rate lock is a lender’s commitment to fund a loan at a specific rate during a set period of time. The borrower gets a commitment of protection against rates rising during the lock period. In a rising rates market, this is a good thing.

Rate locks typically are offered for a fixed number of days, from 10 to 60 days for the most part. The lock term will be agreed upon by you and the loan officer you are working with. It is imperative that you address this upfront, especially in highly volatile markets such as we are facing right now.

What is the cost to lock a mortgage rate?

You may hear that there is no fee to lock a rate. That may just be a matter of semantics. As a consumer, you need to know that nothing in the mortgage business is free.

Though they may not want cash upfront to lock your rate (that’s illegal, by the way), there is definitely a cost. Here is how that works.

Let’s say you have an application in for a refinance and are thinking of locking the rate. You have been eyeing the 5.0 rate you saw in the advertisement for refinancing, and you want to secure the rate. The lender will have a fee or a credit associated with that rate on a given day and time of the day (surprise, rates change multiple times a day!). For example, if you want to lock the 5.0 rate for 10 days since everything is ready on your loan and can close in 10 days, the cost for that lock term may be zero right now when you are on the phone with the lender. It is rarely that exact, there is usually some form of credit or cost.

That is one scenario. If, on the other hand, you just started your application and it takes 30 days to close your loan, the lender, on the same day and time, might offer to lock your loan for 30 days for, say, ¼ point. Or they may offer you a 5.125% rate lock for 30 days at no cost. The rate is slightly higher, but there is nothing added to your closing costs.

The above exchange of rate/fee/lock term plays out daily in the business. That’s how the mortgage business runs. So you can deduce that there is a cost to lock a rate, just not an upfront fee that you would have to pay.

Do rate locks work differently on a home purchase or refinance?

There are actually some differences in your lock options on purchases with some mortgage lenders. In particular, if you are purchasing a newly built home that may still be under construction by a builder.

In a very volatile market, like our current market, it may be a significant benefit to lock in your rate for up to 120 days. Within the last twelve months, 30-year rates have more than doubled. In just 45 days, as of mid-September, rates went up 1.25%, which translates to a substantial increase in mortgage payments. Unfortunately, many buyers could be disqualified from buying a house due to the increase in rates. This is where you want to make sure to discuss lock options with your lender.

As I was explaining, some lenders who work closely with builders offer long term rate locks with a float-down option which can be exercised once during the lock period. And yes, there is a cost for that as well. You may have to pay an extra ½ point for the float-down option, but securing your home purchase may be well worth it.

Mortgage rate lock float down allows you to lock in the interest rate on a mortgage with an option to reduce it if the rates fall during the lock period.

When is the best time to lock in a rate?

This is THE correct question to ask. Unfortunately, many borrowers ask “when is the best time to lock the lowest rate”, which is taking stabs at predicting the future.

The best time to lock a rate is when you are comfortable that you have made the right decision, and the rate that you are locking suits your needs. This is “big picture” thinking about when to lock.

We also need to consider the details, such as the timing to lock when you are applying for a loan. You will have options to lock your rate at application time or any time thereafter up to 10 days before closing.

The best time to lock the loan is upfront in most cases. The reason is that you want to make sure you get the deal you bought into at the beginning. If it’s a refinance, you want to ensure you don’t end up paying more because rates go up. You may not save what you were originally promised, which can be a big headache. The best way to avoid that is to lock the rate upfront and eliminate closing day surprises.

For home purchases, there is nothing more nerve-wracking than losing sleep over what’s going to happen to your rate and payments while you are waiting to close. Lock that rate, put it behind you, and move on to the other million things you have to deal with on a home purchase.

Is there a difference between locking a mortgage rate with a bank or a broker?

Technically there is no difference, a rate lock is a rate lock. When the lender commits to you to deliver a rate and locks it in, they have to deliver that rate as long as the loan parameters don’t change. That means that you can’t go from a conventional loan to a government loan or from a non-pmi loan to a PMI loan, or conforming loan to a jumbo loan, etc.  If the loan parameters change, the deal is off as far as the lender is concerned. They need to relock your loan, whether it is a bank or a broker.

From a practical sense, there are some advantages to dealing with a broker. There are some options that a bank can’t offer you if rates drop, for example, and you locked your rate early on in the application process. But a broker may be able to offer better options. See below for more details.

What if I change my mind once I’ve locked my rate?

This depends on who you ask. If you talk to your lender, they will say you are out of luck (they may be a little more delicate in their wording). I’ll let you in on a little secret, though — depending on the type of lender, the type of loan, and where you are in the loan process, you may be able to get a better rate if rates drop and you have already locked your loan.

Here is how: brokers have more than one wholesale lender with which they can lock your loan. If you locked your loan upfront, and two weeks later, rates drop, you can call your broker and see if they can relock with a different wholesale lender.

This will primarily work on conventional loans before the appraisal is done. I’ll spare you the brain damage of even more insider details; just know that if you have a government loan and the appraisal is done, that won’t be an option.

In closing

That is all the inside scoop on rate locks. You now have an insider’s view on rate locks to help you get the right mortgage rate and, more importantly, not lose sleep over whether to lock or not to lock.

One parting piece of advice; don’t fall victim to “buyer’s remorse” after you lock your rate. It often happens that borrowers will pay even more attention to mortgage rates once they have locked a loan to make sure they got the best deal. That is usually counterproductive and leads to anxiety.

We can’t predict the future, but what we can do is use mortgage rate locks to our advantage to make sure when we close on our loan, we get the same deal we signed up for, not worse.

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