Understanding Mortgage Rate Lock

Investment risk and uncertainty in the real estate housing market

When you are shopping the real estate market for your first home, the word “interest” is going to be flying around a lot.  You’re going to want to find the best mortgage loans for the lowest interest rate, and lenders know this. That is why they’ll often “lock down” a certain interest rate for a period of time while you shop lenders and come to a decision. When lenders do this, it is called “rate lock.”

What Happens When Interest Rates Fluctuate?

According to a mortgage broker in North York, a rate lock essentially protects borrowers from increasing interest rates. For a period of usually 30 to 60 days, a lender can lock down a specific interest rate that you will be expected to pay if you choose to take their loan. If during this time, interest rates on the market begin to climb, you will be protected from having to pay more in interest.

This can be a great way to save money on your mortgage loan, unless interest rates actually decline during that locked-in period. If this happens, there’s no guarantee that you’ll be able to take advantage of the reduced interest rates reflected in the market. You will likely be on the hook for the higher amount that you locked in, not the current lower amount.

However, some provisions can allow borrowers to pay a lower rate if interest rates decrease. A “float-down” provision can be added to your rate lock agreement with your lender, but it can be expensive to amend an agreement with a lender in this fashion. Alternatively, a new agreement can be penned to reflect the new, lower interest rate. Unfortunately, this is also quite an expensive process much of the time.

It is challenging and costly to modify a rate lock agreement with a lender, so it’s in your best interest to have your rates locked in at the right time.

When Should I Lock in my Rate?

At any time, you can ask your lender to lock in your rate. It is absolutely essential, for your protection and for the lending institution’s protection, to get this done in writing. But when should this be done? After all, if it takes longer than 60 days for your loan to clear, your 60-day rate lock will no longer guarantee you a lower interest rate. So, when is the right time to lock it down?

●     After you have signed a purchasing agreement on your desired property

●     When you are confident that your loan will be processed during the window of time that the rate lock affords you

It is good business to ask the lender their average mortgage processing time, so that you can lock in your rate with confidence knowing that your mortgage will be processed within the 30-60 day time frame afforded by the lender’s rate lock.

Understanding the ways that rate lock protects you, as well as ways in which it doesn’t, is an important part of locking in a mortgage rate with any lender. Generally speaking, it is advisable to accept the longest rate lock option possible-some lenders allow for as long as 90 days-to ensure that your loan will be processed in time to take advantage of the rate that your lender has locked in for you.