Everything You Need to Know About Mortgage Rate Lock
You have probably embarked on the exciting yet nerve-wracking voyage of purchasing a home. Amidst the sea of paperwork, open houses, and numerous coffee meetings with your realtor, you have come across the term “mortgage rate lock.” Let’s pause and dive deep into this topic.
No! It is not some medieval contraption to keep your home safe. But in some ways, it might be even more valuable.
What is a Mortgage Rate Lock?
Imagine you are shopping for the perfect pair of jeans. You find them on sale today, but who knows about tomorrow? A mortgage rate lock is akin to a store promising to honor today’s sale price, even if you decide to buy those jeans next week.
So, it is a lender’s promise to “lock in” a particular interest rate and a number of points for you for a specified period of time while your loan application is processed.
Why Should You Care?
Rates are a bit like the weather – constantly changing. A slight increase in interest rates might seem small, but over the life of a 30-year mortgage, even a 0.25% hike can cost you tens of thousands.
By locking in a rate, you are essentially putting on a raincoat, ready to face any storm of sudden rate increases.
What if Rates Go Down?
If rates drop significantly after you have locked in, you might feel like you missed out on a great party. Some lenders offer a “float down” option, which allows borrowers to get a lower rate if rates decrease during the lock period.
But, like most good things in life, it might come at a cost.
How Do You Lock in a Rate?
Typically, once you have chosen a house and are officially in the loan process, you can ask your lender to lock in your rate. Some might offer the option right after your initial loan application.
Make sure to get the rate lock in writing. A handshake or a “trust me” will not cut it in this realm.
Is There a Cost?
Here is where things get spicy. Some lenders offer rate locks for free, while others might charge a fee. Additionally, the longer the rate lock period, the higher the fee might be.
It is a bit like paying extra for a longer warranty on a gadget.
What Happens if You Don’t Close on Time?
Life happens. Delays pop up. If your loan does not get processed within your lock period, you might be in a pickle. Some lenders might extend the lock for free or for a fee.
And others might say, “Sorry, time is up!” And you will be at the mercy of the current rates.
When Should You Lock in Your Rate?
This one is a blend of science and art. Keep an eye on the current market trends, and consult with your lender or financial advisor. If rates are unusually low or you think they might rise before closing, locking in might be your best bet.
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