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Lock in mortgage rate or float

When are you locked into a mortgage lender?

Padlock on interest rate symbolYou want the lowest interest rate for your mortgage, that's understandable. A low interest rate means a lower monthly payment each month. But did you know that a lender can quote you an interest rate but not "guarantee" that low rate? It happens all the time. Home buyers and homeowners seeking to refinance their mortgage are deceived every day by lenders who will tantalize you with a phenomenal interest rate, but, will not tell you that the interest rate is "floating". That means the interest rate could be higher when you close your loan.

An unbelievable rate that's too good to be true, probably is

Here's how the rate game works. You call around and find that most lenders are quoting 5% and then you find a lender who’s willing to process your mortgage at 4%. You can't wait to make application and close your loan. Then, just before signing a stack of papers at settlement, you learn the interest rate is 5.5%not 4% because that unbelievable interest rate was not guaranteed. You're fit to be tied. You scream until your voice is raw, but there's nothing you can do, other than cancel the mortgage.

Cancelling the mortgage when you’re purchasing a house can be complicated because you may have the moving truck scheduled, or gave up your apartment or sold your house. Then there's the seller. Will they allow you to make another mortgage application?

What does it mean to lock the interest rate?

Interest rates can be "locked" for 15, 30, 45, 60 days or longer. The interest rate is guaranteed for that period of time. You're protected if the interest rates go up. And if the interest rates go down, will the lender give you the lower rate? Probably not. You will still close at the locked rate.

Interest rates that are not locked, are called “floating” rates. The loan will close at the market rate just prior to closing. The lender will assign the current rate to the mortgage.

The interest rate (or the closing costs) increases with the lock period. Lenders lock/guarantee the interest rate based on the amount of time that it will take to process the mortgage. If a lender estimates 45 days to process the mortgage, a conservative lock time is 60 days. Lenders are able to extend the lock period for a premium.

How do I know if my rate is locked?

The Federal Government is aware of this deceptive sales tactic and now requires lenders to disclose whether the interest rate is "locked" or guaranteed and for what period of time on the loan estimate form. The "Loan Estimate", formerly known as the good faith estimate is a new form that went into effect on October 3, 2015, must be provided to applicants no later than three business days after they enter into a loan application. The lender will inform you of whether the interest rate is locked or not and can be found in the upper right corner of the loan estimate.

Loan estimate with rate lock

What happens if my interest rate lock expires?

If the interest rate lock expires, and the interest rates went up, you will get the higher interest rate. If the rates went down, the lender will give you the locked rate.

How much does a rate lock cost?

Most lenders do not charge a fee for an interest rate lock up to 60 days, however, some lenders will charge you a rate lock. That’s why you always have to ask the loan officer if the quoted rate is locked rate and for what period of time. A low interest rate with only a 15 day rate lock is likely to expire.

Can my interest change even if the rate was locked?

Yes. The lender is permitted to revise the interest rate if the loan terms changed from application. The most common reason for a rate modification is a low appraisal. The lender must notify you of the change no less than 3 business days upon the change. You have the right to cancel the application if you disagree with the rate change.

When shopping for an interest rate, make sure you compare the lenders equally. Ask each lender the interest rate, points, if any, loan term and the rate lock. And also ask the lender their position if the interest rate falls out of lock.

How long can you lock in a mortgage rate?

The typical rate lock is 60 days for most lenders, however, depending on the interest rate climate, lenders may extend the initial rate lock 30 to 60 days for an additional fee. Lenders will almost always permit rate extension up to 30 days beyond the original lock period, again, for a fee.

Can you change your interest rate after you lock in?

Most lenders will not readjust the interest rate after locking a rate.

What if mortgage rates drop after I lock?

That's the gamble of a rate lock. If rates go up, you get the locked rate, however, if interest rates go down, you still get the locked rate. If interest rates decrease significantly, you can always apply to another lender.

When can you lock in a mortgage rate?

Most lenders will lock the interest rate at application, however, there are lenders that will only lock the interest rate just before settlement. Always ask the loan officer what the company's lock in policy is prior to application. Some lenders will advertise a low interest rate, but not tell you that the interest rate is not guaranteed.