Mortgage rates fluctuate for reasons far too complicated for the average homebuyer to follow, much less anticipate. The experts’ own predictions tend to be unreliable, and if you’re a buyer, even a small change in the interest rates can mean a lot of money over the term of your loan.
For example, a $250,000 30-year fixed mortgage paid off in monthly payments of $1200 at an interest rate of 3.93% will cost borrowers $170,824.15 in total interest over the life of the loan. At the interest rate of a year ago, 4.42%, borrowers would end up paying $225,966.73 in total interest—more than $55,000 more. On a monthly basis, the average interest cost would be an average of $486.68 versus $569.19 per month.
Between applying for a mortgage and closing on a home, your rates could change significantly. If they rise and the lender has not guaranteed his rate, you may be stuck paying more than anticipated. Should they fall, you might be unable to take advantage of the windfall.
A lock-in is a lender’s promise to hold a certain interest rate and a certain number of points for a borrower for a specified period of time. Depending upon the lender, you may be able to lock in the interest rate and number of points for when you file your application, during processing of the loan, when the loan is approved, or later.
Locking in Protects Against Rate Hikes
During that time, the cost of mortgages will undoubtedly change. But if the interest rate and points are locked in, borrowers should be protected against increases. However, a locked-in rate could also prevent a borrower from taking advantage of future price decreases, unless the lender is willing to lock in a lower rate that becomes available during this period.
It is a good idea to obtain written, rather than verbal, lock-in agreements to make sure that you fully understand how your lender’s lock—ins and loan commitments work and to have a tangible record of your arrangements with the lender. This record may be useful in the event of a dispute.
What do Lock-ins Cost?
Lenders may charge a fee for locking in the rate of interest and number of points for a mortgage. Some lenders may charge a fee up-front, and may not refund it if the application is withdrawn, if the credit is denied, or if the loan doesn’t close. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction of a percentage point added to the rate you lock in. The amount of the fee and how it is charged will vary among lenders and may depend on the length of the lock-in period. Usually, the longer the period to lock in a rate, the greater the fee.
What Happens If the Lock-in Period Expires?
If the house doesn’t close within the lock-in period, you might lose the interest rate and the number of points you had locked in. This could happen if there are delays in processing, whether they are caused by the borrower, others involved in the settlement process, or even the lender.
If a lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. If market conditions have caused interest rates to rise, most lenders will charge more for the loan. Lenders who intend to keep the loans rather than sell them may have more flexibility in those cases where settlement is not reached before the lock-in expires.
With so many moving parts in play, it’s essential that you understand your lenders lock-in options before agree to the loan. Different lenders have different policies and costs for locking in.