Should You Lock Your Mortgage Rate When They Drop?

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Mortgage refinance, mortgage interest rate

With interest rates currently higher than they have been in years, the real estate industry has slowed a bit over the home-buying surge of the previous years. However, many individuals are still considering a purchase or have purchased recently, expecting to refinance and get a mortgage rate lock when the interest rates decrease. This strategy is a smart plan, but it still requires that you understand exactly what you are doing, as it can have serious financial implications.

What is a mortgage rate lock?

When entering into a mortgage agreement, you usually have the option to lock in your interest rate for a fixed amount of time or float the rate. Floating the rate means that you are subject to any changes in the interest rate, which could force you to make a higher down payment or pay points on your closing agreement. For example, even a half-a-point increase on a $200,000 loan could result in paying approximately $22,000 in interest over the life of the mortgage.

If you lock in your rate, the mortgage interest rate will be preserved as long as you close on the loan before the lock expires. This option is ideal for times when the interest rate is expected to drop soon. If you don’t lock in your mortgage rate, the lender could give you time to request a lock, or you may be able to wait until just before closing to lock in the rate.

Mortgage interest rate locks last about a month, sometimes a bit longer. They are there to give the lender enough time to process the loan. If the loan isn’t processed by the lock deadline, you must request a lock extension or change the terms to reflect the current market rate.

Most lenders do not charge for a mortgage interest rate lock. However, some may charge a small percentage of the loan. Typically, this charge is approximately 0.025% of the loan, which may cost several hundred dollars, depending on the value of the loan. In most cases, this small charge is worth it as it can save you far more over the life of the loan. It’s always wise to inquire about the fees associated with a mortgage rate lock. You may also benefit from shopping around with different lenders to see if you can find more favorable terms than your current lender is offering.

What are the benefits of a mortgage rate lock?

A mortgage rate lock reduces some of the uncertainty in the home-buying process because it shelters you from large interest rate increases. It can help you feel comfortable purchasing at the interest rate level you expect to pay. Therefore, if you like the current rate, you can keep it using a mortgage lock.

Mortgage locks can also reduce some of the uncertainty about what your monthly mortgage will be. Using the previous example of a half-a-point increase on a $200,000 mortgage, this small change increases the anticipated payment by approximately $60. So you can see why mortgage locks are desirable since it gives you peace of mind that your actual payment will be similar to the one you expected.

A rate lock ensures you pay the down payment you had expected, not more. Mortgage rate locks can also reduce the risk of scrambling at the last minute to come up with additional funds for a down payment. As the mortgage rate increases, you may also be required to provide a greater down payment.

If you are undergoing a mortgage refinance, locking in your mortgage interest rate can also ensure that you get the rate you wanted, which is the point of refinancing.

What happens if the interest rate drops after I’ve locked in a rate?

Sometimes, you could have locked in a rate, which drops afterward. Unfortunately, there isn’t a lot of recourse in these cases. Depending on the size of the rate drop, you could consider withdrawing your current mortgage application and starting a new one, but this could have other financial implications, such as:

  • Losing the money you have already paid on an appraisal and other costs, such as a credit check. You may have to pay for them again with a new application.
  • Paying more for processing a new application if the lender or mortgage broker has higher fees.
  • Waiting longer to close on the home can jeopardize the sale if the seller has a hard date on which they require closing.

The reality is that mortgage rate locks can be highly beneficial under certain circumstances. To learn more about whether a rate lock can benefit your mortgage or mortgage refinance, contact Mortgage News Channel today.

At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible and hands-on throughout the entire mortgage process.