Locking in a Mortgage Rate

When a consumer contacts a mortgage lender to compare mortgage rates and mortgage products, in most cases, the terms that the consumer is quoted represents the mortgage terms for that immediate time period.  The mortgage rate and costs that are given will almost always be those mortgage terms that are available to borrowers settling on their home loan agreement at the time of the quote.  These quoted mortgage rates and mortgage terms may not be the terms available at the mortgage loan settlement that will take place a few weeks to several weeks later.

A mortgage loan lock or mortgage rate lock is a lender’s commitment to offer a certain interest rate with any related origination or discount points for the borrower for a specified period of time.  This assures that the mortgage rate will remain available while the home loan application is processed and underwritten and cover that time period from mortgage loan application to mortgage loan closing.

Sometimes you have no choice as to when you settle on a mortgage interest rate.  You have your eye on a house or condominium, and you are ready to go with a quick closing time frame, so you accept the current mortgage rate or apply for an adjustable rate mortgage that usually does not have a rate lock. 

But what if you can wait, and believe that mortgage rates are falling and may continue to fall, you may want to take a shot at predicting the low point of the market and get the lowest possible mortgage rate.  Wall Street is thrilled when interest rates fall a quarter of one percent, so why shouldn’t you be thrilled too?

Some of the time you will be fortunate and hit at just the right moment, and other times you will miss.  It’s a bit of a gamble.  You may look at today’s mortgage rate, use a mortgage calculator to calculate the monthly mortgage payment and be satisfied with where your mortgage payment is now based on the current mortgage rates.

Mortgage lenders tie mortgage rates to the interest rates on mortgage backed securities.  It is possible to go online and find the current prices and interest rates for mortgage backed securities however, the rates on mortgage backed securities closely follow the interest rates on ten year Treasury bonds.  This is not a direct relationship but the correlation with these rates is very high.  As ten year Treasury rates moves down, mortgage rates generally will too.  It’s fairly easy to follow the financial markets in the newspaper, online, or on television, and you may feel comfortable watching how the Treasury markets, bond prices and interest rates work.

Changes in interest rates on mortgage bonds will usually cause quick changes in consumer mortgage rates.  Home loan rates may change dramatically due to the changes in mortgage bond rates from the day a prospective home owner fills out an application for a mortgage loan to the time they take possession of the home or close on the transaction.  Watching the bond market action gives you a leg up on the near future direction of mortgage rates. 

So, you get approved by a lender and you believe you have their best offer.  At this point you need to decide whether to lock in the interest rate or not.  What risk are you taking if the rate isn’t locked.  If mortgage rates rise a great deal during the mortgage application process, it could bring about a significant change in the monthly mortgage payment.  If your mortgage interest rate and points are locked in, you should be protected against mortgage rate increases while your home loan application is processed. 

To avoid a mortgage rate change from having an adverse impact that may increase the new payment based on this rate change to a point that a borrower may no longer qualify for the home loan program, the mortgage rate lock is a great tool.  To protect against this uncertainty, mortgage lenders allow the borrower to lock-in the mortgage loan’s interest rate, guaranteeing the borrower the prevailing loan rate for a specified period of time, often 30-60 days.

This protection will generally affect the mortgage one way or another.  A locked-in mortgage rate will usually prevent the home loan applicant from taking advantage of mortgage rate decreases, unless the mortgage lender is willing to lock in a lower rate that becomes available during this period.  The mortgage rate lock therefore prevents mortgage rate changes that are higher and can drastically impact the cost of the home loan but also prevent the borrower from obtaining a lower mortgage rate should interest rates decrease before the mortgage loan closes.  How do you decide to lock in the interest rate? 

It turns out that you will probably pay more money to lock in the rate even if locking in the rate turns out to be the right thing to do.  That’s because a mortgage lender will usually charge you in some way to lock in the mortgage rate.  You may pay higher points, or what is called the loan origination fee, in order to lock in the low rate.  Sometimes the mortgage rate is even raised a tiny bit so that you can lock it in.  You pay a bit more because the mortgage lender is taking on the risk that rates could go up while the transaction is processed, so the lender could end up losing money if the loan is funded at a lower-than-market interest rate.

A thirty day interest rate lock might cost a borrower one-half of a point at closing, and a sixty day lock might cost a full point.  These fees are paid at closing.  If a borrower doesn’t want to pay for a lock through points, the fee can be added into the interest rate.

Most borrowers are willing to pay a small and reasonable price for the peace of mind associated with knowing what their interest rate will be at closing.  However, interest rates may continue down, in which case you’ve paid a fee for no good reason.

Or have you?  As the borrower you are free to go elsewhere for a loan if you don’t like the interest rate before the closing.  Your mortgage lender won’t tell you, and it’s a pain to go through the entire process again, but in the long run it may be worth it.  Moreover, if you decide to pull out of the arrangement, the lender may be willing to renegotiate the mortgage rate.  Especially in a market where there is competition for borrowers, a lender won’t let you walk away easily.  It never hurts to ask for a lower mortgage loan rate.

Once you are satisfied with the terms of a home loan you have shopped around for, you may want to obtain a lock-in agreement from the mortgage lender or broker.  The lock-in should include the mortgage rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid.  A fee may be charged for locking in the mortgage loan rate at this time or added on to the cost of the loan.  This fee may be refundable at the home loan closing.