Whether buying a home or refinancing a mortgage, your mortgage lender will require you to lock your rate on the amount borrowed no later than five days prior to closing.
Mortgage rate locks guarantee the interest rate for a "set" period of time, and the length of the lock essentially determines how long you have to close escrow. This is where consumers can often find themselves scrambling to meet the interest rate lock, so the costs don't accumulate.
Rate lock options
As you do your loan comparison shopping, you'll find mortgage rate locks vary in time length.
15-day lock: Provides the "lowest-cost rate" available in the market on any given day. The loan needs to be approved by underwriting to take advantage of this lock.
30-day lock: Fair market rate. This option is most commonly used for interest rate locking upfront before loan approval.
45-day lock: Used for transactions taking longer, whether the loan is approved or not.
60-day lock: Used in circumstances where the loan is prolonged, such as when one borrower is out of town for a period of time, whether the loan is approved or not.
The shorter the lock, the less risk the mortgage lender takes in tying up that money, which means a better interest rate for the consumer.
It's not uncommon to see an interest rate variation by as much as 0.25 percent on the longer rate locks compared against 30-day and 15-day rate locks.
The longer the lock, the more risk the lender takes and the slightly more costly the loan can become, depending on the day you choose to lock in your interest rate. Lenders are always concerned about interest rate risk.
For example, let's say you lock your interest rate today on a 30-year fixed rate mortgage at 3.25 percent for 30 days. If rates rise to 3.5 percent, the lender could make an extra 0.25 percent margin on the money you're committing to borrow. That means if your transaction takes 32 days rather than the locked 30 days, the costs to extend your loan can be upward of half a discount point expressed as a percentage of the loan amount. Using a $300,000 mortgage loan, an extension fee for additional time can run upward of $1,500.
Don't be afraid to let your mortgage lender know that you're shopping around and that you're willing to lock in an interest rate that you deem to be fair and reasonable. A reputable mortgage lender knows consumers shop for mortgages, forcing them to be competitive to stay in business.
All lenders are under very tight underwriting restrictions from Fannie Mae and Freddie Mac, so locking in the mortgage rate does not guarantee that your loan will actually close escrow. Making sure you lender reviews your financials improves the odds, greatly.
Get a rate quote from a lender upfront and make sure it's an interest rate that the lender can pull the trigger on if you say "go." Be prepared to send your mortgage company your credit, debt, income and asset information so it can make sure that you can actually qualify for the amount of money you're looking to borrow.
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Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, California. Scott has been seen in Yahoo! Homes, CNN Money, Marketwatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.