Rate Locks. Penalizing Yourself?
Rate locks continue to be a source of frustration for many borrowers. They sound like a good idea. Lock your rate for 30 days and any change in interest rates doesn’t affect you. Some lenders may offer a rate lock of 45 days or even 60 days. The loan officer may ask if you want to lock the rate at the time you apply. After all, locking the interest rate protects you and costs nothing, right? Should you lock your rate at that time?
All rate locks generally cost you money unless you arrange to close in 10 days or less. The cost may be only a small fraction of a percent. The largest buyers of mortgages, Fannie Mae and Freddie Mac, hold mortgages totaling about $6 trillion. Their influence on rates and pricing can’t be understated. They drive pricing decisions for almost any lender. They price their purchase on 10-day, 30-day, 60-day, and 90-day timelines. Winning Mortgage, Winning Home explains how this works, including float down options. Don’t think float down options are free either.
Costs and Risks
You know interest rates will change day to day. Without a rate lock, your interest rate on your mortgage loan may increase or it may decrease. How much does it cost to lock the rate today? For a 30 year loan as of May 28, locking the rate on a $300,000 loan for more than 60 days will cost you about $4,700 over the life of the loan. That represents less than 1/8% difference in interest rate though. What if you lock the rate for 30 days, but take longer than 30 days to close? You get the then current interest rate or pay a potentially hefty fee (perhaps thousands of dollars) to re-lock or extend the rate lock.
How long does it take to close a loan? As of April 2021, the reported average time to close a loan totaled 51 days. If fell from 58 days in December 2020. In fact, locking the rate for 30 days would be a losing bet for almost a decade. The most recent reported average time to close loans rarely met the 45 day mark. Advances in technology have been offset by additional regulatory burdens adding paperwork, third party verifications, and other hurdles for lenders to make you a loan.
Should You Lock a Rate
The pros and cons, risks and rewards of locking a rate are covered in detail in Winning Mortgage, Winning Home. Shouldn’t you understand the cost prior to applying?