Locking in a fixed mortgage price early has its benefits – and its costs.
Homebuyers who want to land a solid mortgage during their purchasing process, but who are wary of fast-moving loan interest rates, may want to stabilize the scene with an extended mortgage rate lock.
“A mortgage rate lock allows buyers to lock in a rate, ensuring that it won’t change between the time one applies for a mortgage and closes on their home,” said T.J. Williams, regional vice-president at New York City-based Wealth Enhancement Group.
Most lenders offer a built-in 30-or-60-day rate lock which locks in your rate and for that term as long as you close before that time expires. An extended mortgage rate lock, which can range from 60 days to 365 days, acts as an insurance policy for a home buyer that does exactly as it states.
“It extends the number of days that you have in order to close while keeping the agreed-upon rate,” Williams said. “The average closing can take between 50-60 days, so the buyer may be close to losing an expected rate prior to close.”
Given the supply chain issues with new home building, and resulting move-in delays, an extended mortgage rate lock can give homebuyers some much-needed pricing leverage.
“We’re seeing lots of new construction and the time for these houses to be completed can be 6-12 months,” said Jennifer Beeston, senior vice president at Mortgage Lending at Guaranteed Rate Mortgage. “So an extended mortgage lock will lock in your interest rate for that period of time.”
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Cost Considerations
By and large, a homebuyer has multiple options with an extended mortgage rate lock.
While mortgage lenders will typically allow for an up-to-60-day rate lock for free, an extended mortgage rate lock can cost anywhere between 0.25%-to-1.00% of the total mortgage loan amount. Thus, an extended mortgage rate lock for a $300,000 home mortgage may cost $3,000.
The idea, mortgage experts say, is to ensure the extended mortgage rate lock saves you more than the cost of paying for that rate lock.
“There can be a lot of variability across lenders in terms of lock extension offerings,” said Christopher Farrell, vice president of mortgages at Morty, in New York, N.Y. “Anytime you’re extending your rate lock, your lender is going to charge you more relative to a shorter-term lock period.”
“That’s because they’re effectively giving you the rate dictated by today’s market, so if rates go higher within the lock period, they’ll lose money,” Farrell added. “This usually shows up in a higher upfront rate.”
Pros and Cons of an Extended Mortgage Rate Lock
Like most lending rate options, extended mortgage rate locks have their upsides and downsides.
Here’s a snapshot.
Pros of an extended mortgage rate lock.
– Extends the known rate in the event that closing takes longer than expected.
– Helps to give you a known rate that helps for planning and budgeting.
– Some lenders may offer a “float down” feature that allows for the rate locked in within the extended rate lock to be reduced at close if rates go down during the period. “This is often offered for an additional cost,” Williams said.
Cons of an extended mortgage rate lock.
– Cost for a feature that may or may not be needed.
– Rates with extended rate locks are often higher than those without due to risk to the lender.
– The cost is often required upfront.
– Running the numbers to calculate how much the additional increase in rate may cost you, may not be worth the cost and higher starting rate of the rate lock.
– As volatility in interest rates increases, so do the odds of these features as well as the starting rate going up in cost as well.
– If you’re unable to close on a mortgage after the extended rate lock expires, you may have paid for the rate lock and not received the benefit. “That’s the case unless your lender offers a refundable rate lock cost feature,” Williams noted.
Tips for Getting the Best Mortgage Rate Lock Deal
Get ahead of the mortgage rate game with these lockdown tips.
– Preparation and planning are best. “Be pre-approved and be prepared to provide lender all material, including income and asset statements and tax returns when requested,” Williams said. “If you’re paying for an extended rate lock, the buyer should do everything in their power to ensure they close within the rate lock period. “
– Be decisive. Make sure you’ll want to continue to close as the cost of the extended rate lock may not be refundable.
– Make sure your credit is solid. “A FICO credit score of 740 or above in most instances will help obtain the best rates,” Williams said.
– Expand your deal options. Be a solid buyer and shop around for the best rate deal.
– Have a plan and do the math. “Ask yourself key questions,” Williams advised. “How much would a .5% increase in mortgage rate cost per month? How much higher is the starting rate of the extended rate lock offer and how much does the extended rate lock cost? What is the break-even for the cost? Answer those queries to land the best extended mortgage rate lock deal.”
