When to freeze your mortgage rate

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Whether you’re optimistic that mortgage rates will come down or resigned that rates will stay above historic 2021 lows, you may be wondering when it makes sense to sign an agreement with your lender that includes a specific one fixed interest rate.

We asked two experts for advice: Eric Johnson, branch manager and mortgage originator in Green Bay, Wisconsin Inlanta Mortgage, based in Pewaukee, Wisconsin; and TJ Williams, a regional vice president and real estate consultant in New York City wealth accumulation group, a registered investment adviser. Both replied via email and their replies have been edited.

How does a typical rate lock work?

Williams: Mortgage rate locks allow borrowers to lock in a specific interest rate for a specific period of time after signing the purchase agreement to purchase a home. This helps the borrower in that the expected operating costs of the home will not change due to a possible increase in interest rates between the time they made the offer or set the interest rate and the time they close the home. Often, the buyer can set the price at any time after approval and can sign the purchase agreement up to five to ten days before closing.

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There are two basic types of rate locks. The first is often a built-in rate lock for 30 or 60 days. During this time, the application is processed, income verified, inspections conducted, and the lender, seller, and borrower work together to achieve home completion. The buyer can often choose when to lock in the interest rate during this process. The second is an “extended rate lock”. This is an additional extended hold for a varying period of time (usually an additional 30 to 60 days but can be extended to almost a year for new builds) and is used when the borrower believes that the initial 30 to 60 days may not be enough time to be successful near the house.

What are typical costs to fix a rate for different time periods?

Johnson: Most loan programs have no upfront cost to set a rate. When an interest rate is locked, borrowers are alerted that the lock confirms their interest rate, which has been agreed upon by both the lender and the borrower. Longer embargoes, such as B. Six-month locks are more likely to require an upfront fee from the borrower, which is forfeited if the borrower does not deal with the lender that provided the rate lock. In general, the interest rate difference between a 30-day lock and a 75-day lock would be a 0.125 percent higher interest rate for the longer lock period.

Williams: For lenders that don’t offer an initial rate lock of 30 to 60 days, they can first offer a lower interest rate and then charge between 0.25 percent and 0.50 percent of the loan amount for the set rate lock. Typically, the higher the volatility in the interest rate market, the higher the cost.

The difference in how and when the cost of extended rate lock is calculated, and what the cost can be, can vary widely from lender to lender and program to program. For example, a lender may charge anywhere from 0.05 percent to 0.375 percent of the loan amount to secure an interest rate up front.

Why should buyers consider fixing their price?

Johnson: Borrowers should consider fixing their mortgage rate once their purchase offer is accepted. I always recommend that a borrower work with a licensed professional to advise them of all the options available and when would be the best time to lock in a rate.

Williams: A buyer must determine whether the cost of a rate lock or extended rate lock is really worth the investment by calculating the cost of a loan without a rate lock and comparing the additional rate increase and the cost of extending the rate.

If the borrower can’t afford to risk a higher interest rate, and they think there may be delays in closing, there may be reason to explore an extended interest rate hold — especially if the buyer is on the higher end of their budget buys.

When should buyers consider a longer rate lock?

Johnson: Borrowers should consider longer-term interest rate fixation in a rising interest rate environment such as we are currently experiencing.

Williams: When a buyer is buying new homes where the time to close may be months rather than weeks, or when the buyer has reason to believe there may be a longer delay in closing, they should generally consider a longer rate hold draw. In times of significant and sometimes dramatic interest rate increases, the longer time between offer and closing can justify a longer fixed rate period.

What happens if a buyer doesn’t set their price? Could you lose the loan approval?

Johnson: Failure to set an interest rate may pose a risk in situations where a borrower’s purchase and loan requests are near or at the maximum of what they are permitted to purchase and borrow and could jeopardize their ability to qualify for the loan. If the interest rate increases, it would increase the borrower’s monthly payment and could prevent loan approval if other adjustments cannot be made. Borrowers should work closely with a licensed mortgage lender to review their overall financial circumstances and ensure that the loan is set up to help the borrower meet their financial goals.

Williams: If interest rates rise during the mortgage application process and underwriting to a point where the lender believes the loan is no longer affordable for the buyer and the interest rate has not been fixed, it is possible – and likely – that the lender will Approval can revoke the mortgage.

A buyer and the lender should have an open dialogue to understand at what price the buyer may no longer be able to afford the home. A more important step is to know not only what you are approved for as a buyer, but more importantly what you can actually afford and are financially healthy.

What happens if prices drop during a rate lock?

Johnson: An interest rate hold is a commitment by the lender to make a loan at the rate specified for the borrower. It is also an obligation of the borrower to accept and conclude the agreed interest rate. The borrower is protected if interest rates rise after the lockdown. Unless the borrower has purchased a “float down” option, the interest rate cannot be reduced if interest rates fall prior to closing. The term “lock in” confirms that the tariff has been agreed by all parties.

Williams: The availability of a “float down option” varies between lenders and programs, and costs often range from an additional 0.5 percent to 1 percent of the loan amount.

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