What’s a Mortgage Rate Lock and Why Do I Need One?
With the increase in rates, many borrowers are reminded that every lender has their own policies when it comes to rate locks and the options when the lock is set to expire. The home loan business is one of the few that offer a consumer to lock in a price now for something that happens in the future: the closing of their loan. How does that work, and what general options are available when facing expiration before a borrower is ready to close?
A rate lock protects the borrower from rising interest rates: So, if the borrower locks in a rate of 4 percent, he will only have to pay 4 percent interest even if rates rise while he’s going through the loan application process. Usually, a rate lock is good for 30, 45 or 60 days, though that time period can be shorter or longer; once that period expires, the borrower is no longer guaranteed the locked-in rate unless the lender agrees to extend it.
Nations Lending Mortgage Advisors know that while everyone wants to close before a rate lock expires sometimes that is not possible due to many circumstances, from a sale escrow falling out, an issue with an appraisal or property condition, or inability to get required paperwork such as a payoff statement from a lender or an insurance policy. When this happens, we need to see what is the best option available to extend the rate lock, and in an up-rate market protect you and your payment.
When there is an issue with the closing of a new home loan, whether a purchase or a refinance, there are essentially two options offered, or variations of those options.
- Some let the rate lock be broken, and then let the borrower wait until they are ready to close and re-lock the loan. If this policy is followed, then typically borrowers receive the worst between the original lock or the current rate sheet on the day the loan is re-locked plus an additional fee. The risk on floating a rate lock extension is that the market goes up or stays up during the period; if rates drop it can be advantageous.
- The borrower, near rate lock expiration, will pay for an extension of the same rate they currently have. The price will vary based on market and policy, and usually the cost is added to the final closing costs. An experienced originator will usually claim that most borrowers take this option when the costs are compared.
Rate lock policies are very important, and your Nations Lending Mortgage Advisor will explain that it can be costly if a loan is not able to be closed within the rate lock period. Because of this it is critical borrowers provide lenders with all required documents as soon as possible!