Mortgage Interest Rate Lock-In Information

You would think locking-in an interest rate for your mortgage is a very simple process. What is there to think about? You are given your choices, and you pick one and lock-in. Right? Not much to it?! It’s amazing what the average consumer doesn’t know, and what they should be thinking about. Read below to learn about what will be important for your next mortgage application and interest rate lock-in.

What is a rate lock-in?

A rate lock-in on a mortgage is a commitment from your mortgage lender that they will honor specific mortgage terms. A rate lock will have an interest rate of course. There may also possibly be a cost called discount points. Or there may be no points or cost. There could possibly even be a lender credit, which is where the lender pays a sum of money towards your closing costs. And a rate lock-in is always locked-in for a certain period of days, which is how long the terms are guaranteed.

During the term of the rate lock-in there cannot be any changes in your circumstances with your income, credit score, debt ratios, and other things. The rate lock-in terms may change if your circumstances change. If there are no changes in your circumstances the lender will honor the rate lock-in.

When should you lock-in your mortgage terms?

This is a complicated answer. In my opinion I would always lock-in an interest rate and terms the first day I am eligible to do so. The first day that you have an offer accepted by the seller is the first date you can lock-in terms. This requires getting a copy of the fully ratified sales contract to your lender. Some people don’t lock-in right away and they wait a period of time to play the market. They do this to wait and see if rates will come down. I’ve never wanted to be a market timer, so that’s not a game I would suggest people play. But of course, it’s everybody’s individual choice as to when they lock-in their interest rate. I prefer to cover my risk immediately. If rates go up and I have locked-in, I’m protected. If rates go down, they usually go down slightly between the first day I can lock-in my terms and the closing date, so why risk it for what is usually a small gain.

What are discount points versus no discount points versus a lender credit?

Every 1.00 discount point equals 1% of the loan amount. A 0.50 discount point equals .5% of the loan amount, and so on.

Examples are:

• $500,000 loan x 1.00 discount point = $5,000 in cost for the 1.00 point, due at closing
• $500,000 loan x 0.50 discount point = $2,500 in cost for the 0.50 point, due at closing

Lenders charge discount points as part of buying down an interest rate. They may quote your rate with 0.00 discount points, and also quote lower rates with discount points. You should do the math and see how quickly you’d recapture the cost of the discount points in exchange for a lower interest rate, and then determine if you’re going to own the property that long or longer to make the discount points worthwhile.

If a mortgage lender says an interest rate has no discount points, that means they’re not charging you anything to get that interest-rate. In the mortgage industry we call that the “par” quote. That means there are no discount points and there are no lender credits.

Speaking of lender credits, a lender credit results when you take an interest rate higher than the rate with no discount points.

Examples are:

• $500,000 loan x 1.00 point lender credit = $5,000 in credits, to be applied against costs at closing.
• $500,000 loan x 0.50 point lender credit = $2,500 in credits, to be applied against costs at closing.

Some people might be willing to take a higher interest rate to obtain lender credits to pay for closing costs when they are refinancing. This is another situation where you must determine how long you think are you going to have the mortgage, and determine if it makes more sense for you to pay discount points to get a lower rate, or get a loan with no discount points, or take a higher interest rate and get lender credits.

For more information on discount points and lender credits click here.

Does locking-in your mortgage terms cost anything?

On the typical mortgage transaction locking-in your interest-rate likely will not cost anything. But that is not always the case. If you’re buying a new construction property or have a lengthy closing date for other reasons, you may have to pay discount points to pay for an extended rate lock-in period. The timelines will vary at different lenders, but if your closing is going to take over 45 days, you should expect to be paying an increased cost for your mortgage terms. The degree will depend on the length of your closing date.

Can I lock-in my mortgage terms before buying a home?

The answer to this question is usually, no. Without having a home under contract, it would not be possible for the lender to know what county you’re buying in, what city, what property type, what purchase price, what loan amount, what your debt ratios are, etc. These are all data points that play into the cost of your rate lock-in. However, I have occasionally seen over my decades in the mortgage business a lender come out and say they will give you a “pre-lock”, and lock-in your terms without having a property under contract. I find that those terms are usually expensive, however.

 Is my interest rate locked-in indefinitely?

No, your interest-rate is not locked-in indefinitely, and this is important to know. A lot of mortgage borrowers don’t read the fine print and don’t realize there is a lock-in expiration date on their rate lock-in. This means there is a date by which you must go to settlement on your loan, or suffer one of two consequences.

The first consequence might be that your lock-in expires and you’ll be subject to higher market terms at that time.

The second consequence would be that instead of letting your lock-in expire, your lender would offer to extend it, but they would charge you discount points for that extension. And rate lock-in extension fees can be quite expensive. When you initially lock-in your mortgage terms at first, you want to take a hard look at when the rate lock-in expires, and be as sure as you can be that you will go to closing by that date.

How long should I lock-in for?

You should lock-in for as long as you need to make sure that your interest-rate is guaranteed through your closing date. However, it’s important to know that rate lock-ins usually come in predefined periods of a fixed number of days. For example, you’ll find rate lock-ins might be 21 days, 25 days, 30 days, 45 days, 60 days, etc. There are not usually rate lock-ins like 18 days, 29 days, 33 days, etc.

There may even be lock-in periods of 90 days, 120 days, or even 6 and 9 month lock-ins for new construction homes. But again, you should ask your mortgage lender at what point you’re paying a premium for a longer term rate lock-in.

If your sales contract calls for you to close in 28 days, you might lock-in for 30 days. Or in some instances lenders may custom lock-in a 28 day rate lock-in by taking a 25 day rate lock-in and adding a 3 day rate lock-in extension to it.

How do I know I’m getting a good deal?

This is the most complicated question of all, in all of life. Pricing is difficult not only related to mortgage terms, but to everything that we shop for and buy in life. This is true for products as well as services. We all like to think we can shop around the internet for a better deal. But what are we really getting for the lower price if we do find one? Have we considered execution, experience, post transaction support, responsiveness, and many other things that play into how something gets priced?

I won’t address this in detail in this blog because I have discussed it before. If you’re interested you can read more on this in blogs here, here and here. Or just remember the old adage, “there’s no free lunch”.

Can I improve on my locked-in interest rate if mortgage terms go down after I lock-in?

Maybe. Maybe not. Yes. No. Sorry, there are a lot of answers. First, it depends on who your mortgage lender is. Some mortgage lenders will allow for what is called a ‘float down’. A float down is the terminology used when a lender offers you the chance to improve your mortgage terms after you have already locked-in. Some lenders do not offer this at all. If a mortgage lender does offer it, there will certainly be guidelines and requirements to consider. The guidelines for this may look like the following:

• The interest rate must be to the benefit of the borrower by a minimum of .125%.
• The lender must be in receipt of all loan documents required to make a credit decision
• The loan must be scheduled to close within 30 days of the renegotiation request.
• The final price of the new lock-in will be 1/8% above the current market.
• The rate renegotiation is available once per loan file.
• Float downs should be done a minimum of 5 business days before closing.

What if I can’t close on time and I need more time on my lock-in?

As I said previously in this blog if you need to extend your rate lock-in that is usually possible. A lender will charge you a certain amount of discount points based on the loan amount for rate lock-in extensions.

The following is an example of how this might be structured:

First rate lock-in extension

• 5 days = .125% (this is $625 on a $500,000 loan amount)
• 7 days = .15% (this is $750 on a $500,000 loan amount)
• 10 days = .22% (this is $1,100 on a $500,000 loan amount)
• 15 days = .325% (this is $1,625 on a $500,000 loan amount)
• 30 days = .65% (this is $3,250 on a $500,000 loan amount)

Second and third rate lock-in extensions, if needed, would likely be more expensive than the above. You can see why it is so important to try and get the number of days on your rate lock-in correct the first time.

Mortgage lock-in guidelines can change at any time, so always talk to an experienced mortgage loan officer who will help you understand the current guidelines and how they might apply to you.