What is a Mortgage Rate Lock & How Does it Work?

May 5, 2023 | Credit, Loans, and Debt, Home and Auto

If you’re buying a house, you want to get the best deal possible, which means you want the lowest interest rates—the lower your interest rates are, the less you’ll pay over the life of the loan. Buying a house can take a while, though, and in the time it takes you to find the house and go through the buying process, interest rates could rise or fall significantly.

WHAT IS A MORTGAGE RATE LOCK?

A mortgage rate lock allows a borrower to lock in the current interest rate with their mortgage lender for a specific period of time. When you request a “rate lock,” you ask your lender to guarantee a specific interest rate on your mortgage loan for a set amount of time (usually up to 45 days or longer). You can usually have your rate locked for free and once the lock is in place, your rate will remain stable despite increases or decreases in the market.

HOW WILL A RATE LOCK HELP ME?

Locking your mortgage rate can of course help by allowing you to take advantage of low rates. It can also help you budget for the purchase because when you know the amount and the rate, you can determine what you’ll have to pay each month and whether you have enough cash flow to cover costs.

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WHAT IF I DON’T GET A MORTGAGE RATE LOCK?

Without a rate lock, the interest rate on the mortgage will “float,” increasing or decreasing without any cap. Most loan processes take between four and six weeks, which is enough time for substantial fluctuations in the market. If you decide to float, the interest rate would be set 10 business days prior to closing.

ONCE I LOCK IT, CAN I UNLOCK IT?

Once you lock in your rate, it is locked until closing. The loan program cannot be changed, nor can the rate go up or down during the rate lock period, including any extensions. In addition, the loan amount cannot be changed by more than $10,000 in either direction.

WHEN DO I NEED TO LOCK THE RATE?

Rate locks need to be completed by 4:00 PM on the day on which you want to lock in your rate. This means that if you get the rate form to your mortgage lender after 4:00 PM, it won’t be locked until the next business day. Mortgage rates are subject to change daily, so you may not get the rate you hoped for if you get the form in late.

SHOULD I LOCK MY MORTGAGE RATE TODAY?

Whether to lock the rate or not is a decision you will have to make on your own, based on your situation and what you know about current interest rates. Your mortgage lender cannot advise you on this matter because they cannot predict interest rates.

That said, you may NOT want to request a rate lock when

You are building a home and the construction period will stretch beyond the rate lock period,
Interest rates are declining,
You’re not certain this is the right loan for you, or
You are unsure if the home is 100% complete. Most financial institutions won’t offer rate locks for homes that are not 100% complete (painting, siding, seed trim, etc. all need to be done).

I see a rate lock like gambling—the choice is yours. You can win if the rates rise or you can lose if the rates drop after you are locked.

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About Tammy Farnham

With over 26 years of credit union experience, Tammy Farnham is a mortgage originator who serves the mortgage needs of Vermont families in Northeastern and Central Vermont, including Essex, Caledonia, Orange, Orleans and Washington Counties. Tammy enjoys helping Vermonters with their financial needs and assisting borrowers with their mortgage needs. Tammy grew up in Plainfield, where she currently lives with her husband and two grown children. She spends her free time helping with her family business, Farnham Farm Maple Sugaring. She likes to do crafts and gardening and spend time with family, friends, and her dog Callie.

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