What Is a Mortgage Rate Lock?

What Is a Mortgage Rate Lock?

GTG Financial, Inc
GTG Financial, Inc
Published on October 5, 2020

What Is a Mortgage Rate Lock?

Mortgage interest rates can fluctuate rapidly - they move up and down from day to day and even from hour to hour. This can impact the amount you pay when you refinance your mortgage. A mortgage rate lock protects you from costly fluctuations and freezes your interest rate while you close on your refinance.

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What Is A Mortgage Rate Lock?

A mortgage rate lock, also known as rate protection, keeps your interest rate from rising between the time you apply for a refinance and the time you close on your new loan.

If interest rates happen to go up during the period when your rate is locked, you get to keep your lower rate. On the other hand, if you lock your rate and interest rates go down, you can't take advantage of the lower rate unless your rate lock includes a float-down option. A float-down option allows you to take advantage of an interest rate decrease during your lock period.

Why Do Mortgage Rates Change?

Mortgage interest rate changes are influenced by the market. Let's look at what factors determine interest rates.

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Economic Changes
When the economy does well, interest rates tend to increase. But when the economy slows, interest rates typically drop in hopes that lower interest rates will spur growth.

Federal Funds Rate
The federal funds rate is the rate at which banks and other financial institutions borrow money. The Federal Reserve controls the federal funds rate, which influences mortgage interest rates. In order to keep inflation in check, the Federal Reserve manipulates the federal funds rate.

Mortgage Demand
Supply and demand also play a role in why mortgage rates move. If there's strong demand for homes, interest rates tend to move higher. If demand slumps, rates come down in hopes of spurring growth.

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Mortgage-Backed Securities
Mortgages are often bundled with other loans and sold to investors on the bond market as mortgage-backed securities. In return for buying the securities, investors are paid each month when homeowners make their mortgage payments. The price at which these securities sell can impact the interest rate you pay on your home loan.

Related: What Types Of Mortgages Are Out There?

How Long Can You Lock In A Mortgage Rate?

When you lock your rate, it'll be locked for a specified period of time. The exact lock period varies based on your loan type, where you live, and the lender you choose. Most rate locks have a lock period of 15 to 60 days. If the rate lock expires before your loan closes, you may have the option to pay a fee to extend the lock period. Otherwise, you'll get the interest rate that's available when you lock before closing.

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If things change with regard to your application or financial situation, your lender might cancel your rate lock. Since your interest rate is based on factors like your income and credit, changes to your situation may mean you're no longer eligible for the rate that was originally offered. Opening a new line of credit while you're getting a mortgage, for example, could result in a change to your debt-to-income ratio (DTI) or credit score, which means your lender will need to reevaluate your eligibility for the loan and interest rate.

When To Lock In A Mortgage Rate

You're usually given the option to lock your mortgage rate as soon as your purchase contract is ratified, or as soon as your refinance is initially submitted to the lender for underwiring. However, you may be wondering whether it's smart to lock your rate right away or wait to see if rates drop.

If rates are on the decline, floating your rate (i.e., not locking it) could pay off. Just keep in mind that no one can predict what rates will do. Floating your rate can be risky; even a small increase in interest rates can cost you thousands of dollars over the life of your loan.

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Related: Questions To Ask A Mortgage Lender

Should You Lock Your Mortgage Rate?

If you're happy with rates when you get approved, locking your interest rate is a smart choice. It’s best to lock your rate when you're comfortable with the amount of your monthly mortgage payment.

If you're thinking about floating your mortgage rate, make sure to consider the impact a higher rate may have on your finances. Even a slight increase in the rate can add hundreds of dollars to your mortgage payments each year. Locking your mortgage rate provides security in knowing how much you'll pay each month.

A rate lock is a great step to getting a mortgage with an affordable monthly payment. Rate locks provide you with protection, peace of mind and a little bit of control over the refinance process. 

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GTG Financial, Inc
GTG Financial, Inc
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(707) 546-0440

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