Mortgage Rate Lock: What It Is and When You Should Use It

Key Points

• A mortgage rate lock does just that: it prevents the mortgage rate from changing for a set period.

• Mortgage rates change frequently. A rate lock helps protect you from these fluctuations, so you won't pay more if current market rates rise before you close your loan.

• Depending on the lender, you can lock in your rate for anywhere between 30 and 120 days.

• Some lenders offer rate locks for free, while others charge a fee. Others charge a fee only when they extend the mortgage rate lock period.

If you're shopping for a mortgage, you've already encountered a reality about interest rates: What you see today could be gone tomorrow. A mortgage rate lock ensures your mortgage rate stays the same from initial listing to closing. However, locking in your rate is not a binding agreement to work with that lender. You can still change lenders if you want. Here's what you need to know about rate lock.

What is a mortgage rate lock?

A rate lock guarantees that a mortgage lender will honour a specified interest rate at a fixed price for a specified period.

The benefit of a mortgage rate lock is that it protects you from market fluctuations in interest rates. For example, if your lender sets your rate at 6.68% for 45 days and the rate increases to 7% within that period, you will still get your loan at a lower rate.

"Mortgage interest [rates] can change daily and sometimes several times aday, so we always recommend that borrowers lock in their rates."

- Richard Greene

Branch Manager and Loan Officer, New Mexico Mortgage Company

Finding the rate lock is up to you. If you choose not to and don't have a fixed rate, it's known as a "floating" rate. This is a good strategy: When interest rates generally fall, it pays to take advantage of this favourable movement in the market. (The float is usually 30 to 60 days, but it can be longer if you pay a higher fee to get it.)

Why do mortgage rates fluctuate?

Many factors cause mortgage rates to fluctuate, including the current state of the economy, housing demand, financial markets, and actions taken by the Federal Reserve. Here's how some of these can affect rates.

• Mortgage Demand: When there is strong demand for housing, rates rise. If demand slows down, rates drop to attract more home buyers.

• Economic changes: Rates also rise when the economy is doing well and fall during recessions to encourage growth. Mortgage rates may also react to volatility, such as regional bank failures in early 2023.

• Federal Reserve: The U.S. central bank does not directly set fixed mortgage lending rates, but when the Federal Reserve raises its key interest rate, the mortgage market responds accordingly. Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are particularly affected.

• Treasury bond yields: The 10-year Treasury, in particular, reports movements in mortgage rates and yields on mortgage-backed securities, which are packaged portfolios of hundreds of fixed-rate mortgages.

When can you lock in a mortgage rate?

This depends on the mortgage lender. Some lenders offer a mortgage rate lock once the borrower is pre-approved with a prospective home address. Others may wait for the seller to accept the buyer's offer.

However, if you lock it too soon, you may face an expiration date and an extension fee or new fee. If you are starting to look at properties, it may not be wise to go for a fixed rate right now. You'll want to avoid feeling rushed to find a place and close the loan.

Also, remember that a lender can void a rate lock if certain items on your credit report or mortgage application change between your agreement and final underwriting.

The sweet spot is the optimal combination of interest rate, term and costs. Most lenders will lock your rate for less than 30 days once you're ready to close, and they often offer the same rate for periods of 15 and 45 days. Ask about rates for different lock-in periods: 30, 45, 60 or 120 days. Anything over 60 days is expensive, so it's wise to wait until closer to closing and check again.

How long can the rate be blocked?

While 30- and 60-day fixed rates are standard, you can find a broader range of options. It all depends on what the mortgage lender offers.

Of course, you may have to pay a higher fee for a more extended block. In some cases, this may be an easily justified cost. For construction borrowers, for example, paying an eight-month fixed rate can save them money in the long run, with significantly higher interest rates.

Mortgage Rate Lock Extensions

If you are nearing the end of your mortgage rate lock period and need more time to close on your home, you can pay for a rate lock extension. The fee is usually a percentage of your loan amount. The longer the extension, the more you'll pay. It's usually more efficient to prepay for a more extended rate lock and have a cushion in case you need more time.

How to determine a mortgage rate.

You can lock in your mortgage rate once your lender has done an initial review of your finances. Your lender will likely require some or all of the following documents in advance.

• Credit Report

• Social Security Number Verification (a form you sign)

• Last two months of bank statement.

• Last two months of investment account statements.

• Tax returns for the last one or two years.

• The last year or two of tax forms such as W-2, 1099, etc.

• Payment receipts from the last 30 days

• Proof of identity (For Example, driver's license or passport)

After checking your credit score and getting an idea of how much you plan to put down and other factors, your lender can quote your rate and tell you the fee to lock it in. Is. At this point, it is wise to ask for details about their rate-setting policy. If everything looks good, submit a rate-setting request.

How much does a rate lock cost?

Rate locks aren't free, but that doesn't mean you'll necessarily see a line item charge for them. Most lenders don't charge a separate fee to lock in a rate within a certain period. The cost of the lock is often included in the rate offered. If your lender makes a charge, it will probably be a quarter (or equivalent) of your loan amount.

Lenders usually charge an additional fee for extending the rate lock period. However, beyond the standard 30 or 60 days, ask what to expect if you need to pick a lock.

Should you lock in a mortgage rate?

Given the rise in mortgage rates over the past year, locking in your rate can pay off.

Consider a 30-year loan of $300,000 with an interest rate of 6.74%. At that rate, you'll pay $400,408 in total interest. Let's say you don't lock your rate; when you do, the rates go up to 6.99%. For the same mortgage, you'd pay $418,567 in interest, a difference of $18,159. Consider the fees associated with locking in your rate (if any).

You can use Bankrate's mortgage calculator to understand what you'll pay based on your fixed rate.

Mortgage Rate Lock FAQs

What factors might cause my closing rate to change?

Matlock can give you peace of mind, but it's not always set in stone. This may change due to the following reasons:

• Your credit profile or score has changed (for example, by opening a new credit card).

• The lender needed help verifying or documenting your income correctly.

• You decide on different types of loans or loan amounts.

• Home appraisals were lower or higher than expected.

Review the contract before setting your rate to understand what circumstances require a change.

Can you switch mortgage lenders after you've locked in your rate?

A rate lock doesn't lock you into a deal: If you get better terms and lower closing costs from another lender, you can choose to go with that lender after the rate lock starts with the first lender.

What if I set a rate and the rates go down?

Depending on your lender's policies, you can get a lower rate. Along with standard rate locks on mortgages, some lenders offer floating rate locks, designed to help you take advantage of lower rates if they become available before you close your loan. A floating lock is a win-win: you get the security of your rate now, plus no regrets if the rate drops.

However, there may be fees associated with this option, so you need to make sure the potential savings are worth any additional costs.

Even if there is no additional fee, there will be some fine print to consider. For example, more than implementing a float-down policy may be required if rates fall slightly. Check the details to understand the threshold rates they must cross to use the float-down capability.

What if the rate lock expires before closing?

Real estate transactions are not permanently closed in time. If your rate lock expires before you have the keys, don't panic just yet: Your mortgage lender may offer to extend your rate lock for free or for a fee.

That rate lock extension fee may not even be your responsibility. Depending on who is responsible for the loan not closing on time, the lender may cover or pay a portion of the cost.

If your lender doesn't extend the rate lock, the rate and point combination you locked in may no longer be available. The loan will then be based on the new rate in effect.

How much does it cost to refinance a mortgage?

Key Points

• They are refinancing your mortgage costs between 2% and 5% of the new loan amount. These closing costs may include application, origination, and home appraisal fees.

• To determine if it's worth paying for a refinance, figure out when you'll break even — when the savings on your new mortgage outweigh the initial cost.

• You can save on refinancing costs by improving your credit score, comparing mortgage terms and rates, and negotiating closing costs.

How much does a refinance cost?

According to ClosingCorp, the average mortgage refinance costs $2,375, not including tax. These costs mainly depend on the size of your loan and where you live. You can generally expect to pay between 2% and 5% of the new loan balance in closing costs. If you're refinancing a $200,000 mortgage, you may pay between $4,000 and $10,000 in closing costs. Here's a breakdown of typical closing costs:

Along with closing costs, you’ll pay interest at a new rate. This rate depends on many variables, including:

• Your credit score

• Lender

• Type of refinance

• Loan size and term

• Property type

Is refinancing your mortgage worth it?

If you can get a lower interest rate and plan to hold the loan (in other words, you don't plan to move or sell your home) for a while, refinancing your mortgage is worth it.

Bankrate's mortgage refinance break-even calculator can help determine if refinancing will be worth it. This calculator estimates the break-even point or the time when the savings from a newly refinanced mortgage exceed the closing costs of completing it.

How to reduce the cost of refinancing.

The less you pay to refinance, the more money you can save on interest and the faster you'll realize those savings. Here are some tips to reduce the cost of a new loan:

1. Increase your credit score.

As you look for a particular credit score when applying for your first mortgage, you will need a minimum credit score to refinance. The better your credit, the lower your refinance rate. Among several strategies, you can improve your credit by paying off or cancelling debt.

2. Compare mortgage offers and rates.

To get the best mortgage refinance rate:

1. Compare offers from several lenders.
2. Look at the APR to get a more complete idea of the cost of the loan.
3. Consider working with a mortgage broker to get multiple offers.
4. Always get a quote from your current lender if they offer low-cost refinancing or other benefits for returning customers.

3. Negotiate closing costs.

As with your first mortgage, look closely at your lender's loan estimate to understand the actual cost of refinancing. You can save money by negotiating closing costs, especially if you've shopped around and have more than one refinance offer. You can also use other quotes to check for unusually high rates.

4. Request a fee waiver.

Likewise, ask your bank or lender if they will waive or reduce application or credit check fees. You can also see if you can skip a new home appraisal or property survey if you've had one recently. Your lender may be willing to work with you, especially if they are already a customer.

5. Assess if buying mortgage points is worth it.

If you want to lower the closing costs of your mortgage refinancing, consider whether it's worth buying a mortgage or discount points. Although buying points lowers your interest rate, it's usually best if you expect to own the home for a long time and don't plan to refinance it, even at a later date. You are also paying for significant renovations. You can use Bankrate's mortgage refinance calculator to determine if purchasing points are worth it when refinancing.

6. Go with your original title insurer.

In many states, title rates are regulated. Still, you can reduce title services costs by asking your current title insurance company to reissue the policy on your refinanced loan. How much will it charge you to do? Doing so may cost less than starting a new company or policy.

7. Consider a refinance with no closing costs.

If you're short on cash, consider a no-closing refinance. The name is misleading, as this refinance is not free of closing costs. You will not have to pay any closing fees. Instead, the lender will raise your interest rate or roll the closing costs into the new loan.

Why Refinance Your Mortgage?

• You can lower your monthly payment: If you have a fixed-rate mortgage with a higher than current market rate, refinancing can help you save money on your monthly mortgage payment. In general, it's a good idea to consider refinancing if you can lower your rate by one-half to three-quarters of a percentage point.

• You can shorten your loan term: Refinance your 30-year mortgage with a 15-year loan to pay it off faster and with lower overall interest.

• You can switch from an adjustable-rate loan to a fixed-rate loan: If you have an adjustable-rate mortgage, you can switch to a fixed rate for stable principal and interest payments.

• You Can Get Rid of Private Mortgage Insurance (PMI): If your home has increased in value and you now have 20% equity, one way to eliminate PMI is by refinancing.

• You can get cash out: If you want to pay off credit card debt or make home improvements, you can do a cash-out refinance if you have enough equity. Ensure you have a clear goal for these funds and be realistic about your spending habits. Do you plan to use the money for discretionary spending, such as a vacation, or for an investment, such as furthering your education? If you use the cash to pay off other high-cost debts, will you return to debt?

Frequently Asked Questions About Refinancing Your Mortgage

How does refinancing your mortgage work?

When you refinance your mortgage, you get a new mortgage with a different interest rate and possibly a different loan term. You can also get a new loan from another lender. This new mortgage pays off your original loan.

Will your monthly payments go down when you refinance?

Whether or not your monthly payments go down when you refinance depends on a few factors, including the interest rate and the new mortgage term. For example, if you have a 30-year loan and refinance into a new 30-year loan at a lower interest rate, your payment will be down. If you refinance for a shorter term, your payment may increase even if you get a lower interest rate.

What are the current refinancing rates?

According to Bankrate data, the national average APR on a 30-year refinance was 7.15% through February 5, 2024.

Understanding the Mortgage Underwriting Process

Key Points

• When you apply for a mortgage, lenders use a process called underwriting to determine whether to approve or deny your loan.

• Underwriters consider factors such as your credit history, financial profile, and home appraisal when deciding on your loan.

• The subscription process involves several steps, which may take days or weeks to complete.

What is Mortgage Underwriting?

Mortgage underwriting is a lender's process determining whether to approve your mortgage application.

Before underwriting, a loan officer or mortgage broker gathers credit and financial information for your application. The lender's underwriting department then verifies your identity, checks your credit history, and evaluates your financial situation, including your income, cash reserves, investments, and debts.

Many lenders follow underwriting guidelines issued by Fannie Mae and Freddie Mac, two government-sponsored entities that underwrite and buy mortgages in the secondary mortgage market.

What does a mortgage insurer do?

A mortgage underwriter decides how much risk a lender will take if they approve your loan. To do this, the insurer evaluates your finances and the likelihood that you will be able to repay the loan on time.

A mortgage insurer must:

• Check your credit history. This includes researching your credit report, credit score, and payment records.

• Check your finances. Lenders use specific guidelines as a basis for financing. For example, Fannie Mae's conventional lending guidelines require all borrowers to have a maximum loan-to-value (LTV) ratio of 97%, a minimum credit score of 620, and a debt-to-income (DTI) ratio of 36. There must be more. The lender can complement them with their criteria. It will also analyze the details of your financial situation. For example, you can consider your financial reserves (investments, assets, or savings) or if you will leave the property with tenants if it generates income.

• Request a property appraisal. Your loan approval mainly depends on the amount you are borrowing versus the value of the home you are purchasing. An insurer will order an appraisal of the property to see if the sale price aligns with its appraised value.

• Make a decision. Once all the reports and paperwork are ready, the mortgage insurer will approve or deny your application.

How long does it take to sign a mortgage?

The mortgage underwriting process can take a few days to a few weeks. The timeline depends on whether the insurer needs more information from you, how busy the lender is, and how smooth their procedures are.

Another factor is whether the insurer uses a manual or automated underwriting process. Automated underwriting is usually completed faster than manual underwriting. Still, because a computer does the assessment, it has some limitations that may need to be revised for borrowers with unique circumstances, such as unbalanced incomes.

In these cases, qualifying a borrower through manual underwriting may be easier than an automated system. Lenders sometimes use a combination of automatic and manual underwriting to measure risk.

Underwriting is one of the most time-consuming parts of the home financing process and can take just as long to close. The faster you submit your documents and respond to the lender's requests for information, the smoother and quicker the experience can be.

However, underwriting is only one part of the loan process. You can expect to close the loan entirely within 40 to 50 days.

Steps in the mortgage subscription process

1. Get Pre-Approved.

A mortgage pre-approval is a thorough vetting process that indicates how much a lender is willing to lend you and at what interest rate. A pre-approval is not an offer of loan guarantee but an indication of your potential borrowing capacity. You will need pre-approval to make offers on homes.

2. Verification of Income, Assets and Employment

The next step in the underwriting process is verifying income, assets, and employment. This is when the lender's underwriter checks your credit and financial situation to confirm that you can repay the loan and also verifies your employment. You must submit documents such as W-2 forms, pay stubs, and bank statements for verification. If you are self-employed, you may need to provide additional documents, such as profit and loss statements.

3. Appraisal

An appraisal is a certified appraiser's assessment of a property's value. This is done to ensure that the amount you are borrowing aligns with the value of the home you are buying. If the home's value doesn't cover the mortgage amount, you can negotiate a price with the seller, but you'll likely have to pay the extra money yourself. Sometimes, you may need to exit the contract and start the mortgage application and underwriting process with a new loan.

4. Title Search and Title Insurance

A lender wants to avoid paying for a home with legal rights. That's why a title company ensures that ownership can be transferred.

The title company will investigate the property's history, looking for mortgages, claims, liens, easements, zoning ordinances, pending legal actions, unpaid taxes, and restrictive covenants. If you need help finding your title, you have a few options. You can see if the seller will fix the problem before closing day, request that the seller pay you to fix the problem, or you can stop buying the home.

The title insurer then issues an insurance policy that guarantees the accuracy of their investigation. There are two policies in some cases: one for lender protection (almost always mandatory) and one for owner oversight (optional but obtainable).

5. Underwriting Decision

Once the underwriter is satisfied with your application, appraisal, and title search, your loan is considered ready to close, and you can proceed with closing on the property.

If things don't go well, you may receive one of these decisions:

• Denied: If your mortgage application is rejected, determine why the lender denied it before taking the following steps. For example, if the lender believes you owe too much, you can lower your DTI ratio by paying off your credit card balance and reapplying.

• Suspended: This may mean that some documents are missing from your file. Your application could be stopped if, for example, the insurer could not verify your employment or income. The lender can tell you if you can reactivate your application by providing more information.

• Conditional approval means your loan is approved with no pending condition, such as obtaining a homeowners insurance policy. It would help if you were allowed to close after you provide proof of what is missing.

Once you clear the conditions and approve your mortgage, your home purchase is almost complete. The final step is the closing day, when the lender funds your loan and pays the selling party for the title to the property. This is when you'll sign the final paperwork, settle the closing costs, and receive the keys to your new home.

Tips for a Smooth Mortgage Underwriting Process

The mortgage underwriting process can be complicated and time-consuming, but there are things you can do to make it easier:

1. Organize your documents.

The best way to keep the mortgage underwriting process on track is to organize your financial documents before applying for a loan.

Try to have the following ready when you apply:

• Employment information for the past two years (if self-employed, includes business records and tax returns)

• W-2 for the past two years

• Payment receipts from at least 30 to 60 days before application.

• Account information, including checking, savings, money market accounts, certificates of deposit (CDs), investment accounts, and retirement accounts.

• Additional information about income, such as alimony or child support, annuities, bonuses or commissions, dividends, interest, overtime pay, pensions, or Social Security payments.

• A gift letter if friends or family have given you funds to make a down payment.

2. Get your credit in shape.

A low credit score can complicate getting approved for a mortgage and make your loan more expensive with higher interest rates.

Work to improve your reputation:

• Pay off existing debt.

• Avoid applying for new loans.

• Improve your debt-to-income ratio (aim for 36% or less)

• Check your credit report and dispute any errors.

3. Make a significant down payment.

A mortgage insurer also considers your deal's LTV ratio: how much you're borrowing, also known as loan principal, divided by the property's value. A high LTV ratio indicates that the lender will lose money if you default on your mortgage.

You can lower your LTV ratio by making a larger down payment. The bigger your down payment, the easier it is to qualify.

Don't hesitate to ask family or friends to help you make the down payment. You can also see the payment assistance programs you may be eligible for below. Other ways to save for a more significant down payment include:

• Opening a high-yield savings account.

• Automatically, having a portion of your income goes into a savings account earmarked for your down payment.

• Cutting back on your expenses.

4. Be honest about your financial history

Mortgage underwriters look closely at your credit report and financial history, so don't lie on your application. Tell the lender and explain if you have a negative mark on your credit report, such as a late payment. Lenders may be more lenient on late fees if you go through stressful situations and then make payments.

Mortgage Underwriting Frequently Asked Questions

How does the state of the real estate market affect the duration of the underwriting process?

A hot real estate market can result in longer underwriting terms due to more loan applications. Conversely, a slower market can mean faster valuations. To avoid delays, please submit an accurate and complete application and respond promptly to any requests for additional documentation.

What can cause delays in the underwriting process, and how can they be avoided?

Delays in underwriting may be due to unexplained gaps in your employment history, unverified funds, or low home appraisals. To avoid these problems, be prepared with all necessary documents, respond promptly to lender inquiries, and ensure your financial records are complete. Keeping open lines of communication with your lender and being organized can help avoid many common delays.

The bottom line

The mortgage underwriting process is a comprehensive evaluation of your financial health and creditworthiness to determine whether you qualify for a mortgage. The process involves several steps, from loan pre-approval to the final underwriting decision. To simplify the process, keep your paperwork organized, make sure your credit is in good standing, consider making a sizeable down payment, and be honest about your finances.