When Can You Lock In An Interest Rate On New Construction
Most home buyers can get by with 45- or 60-day rate locks, but what if youre buying new construction and your new home wont be ready for months or even a year? What do you do about your mortgage rate?
Most new construction mortgage lenders will allow you to lock todays mortgage rates for periods of 180 days, 270 days, 360 days, or longer.
But should you lock in a rate so far in advance?
How A Mortgage Rate Lock Works
The best way to understand how a rate lock works is to consider how interest rates might move.
If mortgage rates stay the same: Mortgage rates can dance around for weeks, going up or down a notch or two and end up right where they started. In that case, you might feel as though whatever you paid for the rate lock, if anything, was wasted. But remember, your goal was to prevent rising rates from rocking your budget. A rate lock ensures that they wont.
If interest rates go up: Youre protected. Your interest rate is set. Thats when a rate lock is well worth the price.
If mortgage rates go down: Unless you have a one-time “float down” option on your lock, youll miss the lower rate.
A “float down” option lets you snag a currently available lower interest rate. You can usually trigger it only once.
A “float down” option is most often associated with new construction loans and longer-term rate locks, though it never hurts to ask your lender if a “float down” is available for your loan. The terms, parameters and pricing of a “float down” option will vary widely among lenders.
Timing Your New Construction Rate Lock
There have been times in recent history when locking in a 360-day rate would have paid off. For example, a home builder in August of 2021 could have locked in a 30-year fixed rate of 3 percent. Eleven months later, in July of 2022, that same home builder may pay 6% over a 30-year loan term.
Even if that extended rate lock cost $5,000, the extra cost would have paid off many times over the life of the loan.
That said, its very difficult to predict what will happen with mortgage rates in the future.
Theres always a possibility that rates will rise. So if you can afford the home you want now and have a chance to lock a rate, it may be wise to do so. But your lenders policies and rate lock fees will play into the decision.
You should work closely with your loan officer to analyze current interest rates, how the market is moving, and your own home buying budget. Together, the two of you will decide when it makes sense to lock a new construction mortgage rate.
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Questions To Ask Your Lender Before You Lock
Be sure to get a clear explanation of your lenders rate lock rules. If you lock in a rate too soon and end up going with a different type of loan, your rate lock might be void. Borrowers also can lose a rate lock if their circumstances change such as a shift in their credit score or in their debt-to-income ratio before settlement. The underwriting process could uncover factors you werent aware of or knew were important, so if possible, ask your lender what conditions would void the lock before you commit to it:
- Does the locked rate change in certain circumstances?
- Will the rate lock be in effect long enough to cover the entire homebuying process?
When Can You Get A Mortgage Rate Lock
Most lenders allow you to lock once theyve received your loan application, pulled your credit report and issued a loan estimate. If youre buying a home, lenders typically cant lock your loan rate until you have an accepted purchase contract. However, some lenders offer options that allow you to lock before youve found a home, and then apply the lock to a home once youre under contract.
How Can I Get Cheap Mortgage Interest Rates
Want to lock in the ? You will need a mortgage broker!
If one bank makes an announcement that they are putting their fixed rates up, then it is likely that the other banks will follow.
As your mortgage broker, we keep an eye on the banks announcements and have the most up to date rate pricing available.
This means that we can give you the information you need to make an informed decision on whether you should rate lock, as well as getting you the best possible rates.
How Long Should The Lock Last
Before choosing a lock-in period, determine the average time for loan processing in your market. Ask your lender to estimate the time necessary to process your loan and verify the information with other realty and mortgage professionals. Locks average 30 days but can range from 15 to 60 days or more. Longer is usually better. If the loan doesn’t close on time, lenders can extend your lock for free, charge more for the extension, or charge an additional percentage of the loan amount.
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What Happens If My Rate Lock Expires Before Closing
Your rate will begin to float with daily interest rate movements. The best idea is to talk to your lender well before your lock expires to see if they will extend it. If youve been responding promptly to each information request from the lender, the delays may not be your fault and you might get a little extra time.
What Are Todays Mortgage Rates
After setting record lows during the pandemic, average mortgage rates are once again near historic norms. Wider market forces set the context for rates today, but your rate will be unique to you.
To estimate your rate and loan costs, apply for a mortgage pre-approval.
Not only will a pre-approval show the rate you could likely lock in, itll also show home sellers youre a serious buyer.
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Does It Cost Money To Lock In Your Rate
Sometimes rate locks cost money and sometimes they dont. The rate lock fee may be a flat fee, a percentage of the total mortgage amount or added into the interest rate you lock in. The fees may be refundable or non-refundable. Typically, short-term rate locks are free or cost roughly up to about 0.25 0.50 percent of the total loan, or a few hundred dollars. Lenders typically charge more for longer-term rate locks.
If Interest Rates Stay The Same
If interest rates stay the same after you lock, then youd still have the interest rate you locked. Though you might feel like you wasted money on the mortgage rate lock, your monthly mortgage payment wont increase.
Keep in mind:
If youre wondering what your monthly mortgage payment will look like, enter your loan information into the calculator below to find out.
Enter your loan information to calculate how much you could pay
Checking rates won’t affect your credit score
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When Can I Lock In A Mortgage Interest Rate
You can choose to lock in your mortgage rate from the moment you select a mortgage, up to five days before closing. Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won’t affect you.
The ideal time to lock your mortgage rate is when interest rates are at their lowest, but this is hard to predict even for the experts.
It’s worth noting that interest rates could decrease during your lock period. Should this happen, you’ll most likely have to pay the rate you initially locked in. If your lock period has lapsed before the closing, you may be able to negotiate with your lender for a new rate lock, but it’ll depend on the circumstances and the lender.
Disadvantages Of A Mortgage Rate Lock
Rate locks can be helpful but are not perfect. Here are two of the reasons buyers think twice before locking in an interest rate:
- Rates can change by the hour, and you have no way of knowing if rates will go down before you close on your loan.
- If interest rates do go down, you are stuck with the rate you locked in — you can’t get a lower rate. The exception is if the original rate lock has a “float-down” provision written in to cover such a situation. If a lender does provide a float-down provision, you can expect to pay more for the rate lock.
When it’s time to lock in your mortgage rate, figure out how long you’re likely to need the lock in place. Then, oversee deadlines so that your lock does not expire before you close on your mortgage.
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What Happens If The Rate Goes Up Or Down After You Lock In The Rate
If interest rates rise during your lock-in period, you will not be impacted you will still pay the lower rate that you locked in. If, however, you lock in a rate but then rates drop, you typically will not be able to take advantage of those lower rates instead, youll pay the higher rate that you locked in. There are some exceptions to this: First, if you have a so-called float down provision which states that if rates drop during the rate lock period, the borrower can take advantage of the lower rates in your written rate lock agreement, you should be able to get a loan with the lower interest rate. . Second, you can rewrite your rate lock so that it reflects the new, lower rate, but this, too, can prove costly.
What If My Loan Is An Adjustable
If your loan is an adjustable-rate mortgage , the interest rate disclosed on the Interest Rate Lock Agreement will be the initial interest rate effective until the first change date of your loan. After that, your interest rate may vary in accordance with the change dates and index provided on your mortgage note and loan documents. You’ll find additional information about ARMs in the Consumer Handbook on Adjustable-Rate Mortgages that you’ll receive when you apply.
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Communicate With Your Mortgage Lender
First, talk with your lender about the decision to hold off. Ask your lender what costs are associated with locking in a mortgage rate. Make sure that youre comfortable with the cost and how your may be affected.
Also, ask how long a lock will last. Rate locks often last 15 60 days, but the exact time frame can vary based on the lender. You should choose a time frame thats long enough to move your loan through the underwriting process.
Finally, ask your lender how the process to lock in your rate works so youll be prepared when youre ready.
After I Lock My Interest Rate Will My Rate Change
If there are no changes to your loan application and your loan closes on or before the rate lock expiration date, we will close your loan at the locked interest rate.
However, your interest rate may change from the time of your initial rate lock if there are changes to the factors used to determine your interest rate. These kinds of changes may also be called “rate or price adjusters” because they can raise or lower the interest rate on your loan.
Here are some examples of changes that may raise or lower your interest rate:
- The appraised value of the property is different than the value used when you initially locked your loan.
- Your credit profile or qualifying income changes between the time you initially locked your loan and the loan closing.
- Your requested loan amount increases or decreases after you initially locked your loan.
- The type of loan you are applying for changes.
- Your down payment amount changes.
- Some of your income information, such as bonus or overtime income, cannot be verified.
If your interest rate or costs associated with the interest rate change, we will send you an updated Interest Rate Lock Agreement.
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Why It Makes Sense To Lock In A Mortgage Rate
Locking down your interest rate can give you peace of mind and help you budget your monthly mortgage payment. Skipping the rate lock is a gamble. If rates creep higher while your loan is still in process, your monthly payment can increase and might impact your loan qualification. You could also pay thousands more over the life of a loan.
Lets say youre buying a home for $350,000 with a 15-year mortgage, a 3% fixed APR and a 20% down payment. Just a 0.5% rise in interest rates will drive up your monthly mortgage payments by $68. If you stay in your home through 15 years, that adds up to more than $12,000. Compare that to a 0.25% fee to lock the 3% rate, which would equal just $875.
How Much Does It Cost To Change Lenders
There isnt a specific fee for switching lenders or not finishing your purchase. But before switching, think about what youve already invested with your current lender and in your current loan.
Did you pay an application fee? Have you paid for an appraisal on the home? These items wont be refunded. You may have to go through them again with your new lender. For these reasons, it may be best to try to work through your rate with your current lender rather than jumping to a new one.
If youre changing for better rates, be sure to ask all about the new lenders fees. Low rates dont guarantee the best overall price when you factor in fees and closing costs. Increasingly, some companies are adding buy down fees to get you that attractive low rate.
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Rate Lock Extension Fees
What if you face a hiccup with your seller or new construction and your lock expires before closing?
The good news: When you extend your lock, you typically get to keep the old rate you locked with.
The bad news: Youll be hit with a rate lock extension fee which usually costs a few hundred dollars, depending on how long you need to extend. The exact cost will be a percentage of your loan value. This percentage is lender-specific.
If you need to extend your initial lock past the original expiration date, there are fees. Heres an example of how fees may be structured on extensions:
Lock extension fees can be structured in any way the lender chooses. Extension fees are subject to change based on current market conditions. Ask your mortgage adviser for specific details on their lock extension options.
What Are The Main Elements To Loan Locks
When deciding to lock a loan, there are three points to consider:
- Interest rate
- Length of the lock period
If you’re still shopping around and need more time but want to keep a loan locked, you’ll pay extra for an extended loan lock. The lender might increase the interest rate or use points to reflect the loan lock fee. That’s because the lender is taking on more riskthe risk that rates could go up while the transaction is processed. This can cause the lender to lose money if they fund a loan at a lower-than-market interest rate.
Despite the cost of a loan lock, it’s a good idea to lock your loan rate since it offers you peace of mind. If you have decided you can afford the current loan terms, it’s probably a good time to lock them in.
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Ask For A Better Mortgage Rate
With those little mortgage renewal slips, lenders make it too easy for you to answer the should I renew my mortgage now? question by providing a quick and easy way to renew. They know youâre busy and that youâll pay for this convenience. On average, mortgage providers only offer their existing customers a discount off their posted rate on a renewal slip. But this isnât the lowest possible rate, even from your current lender. On top of that, there are usually lower rates available from other lenders.
Negotiating mortgage renewal for a better rate becomes even more important in a rising rate environment, such as the one we are in today. Hereâs a chart outlining how much you could save by asking for a better rate on a $300,000 mortgage with a 20-year amortization.
Letâs say your mortgage matures next month and that you had previously agreed to a five-year fixed rate at 2.74%. Your current lender may offer you a discount of 0.25% off the posted rate for a new rate of 4.89%.
That would mean monthly payments of $1,953.60. However, shopping around could allow you to find a much better rate for the next five years. Maybe youâll secure a five-year fixed rate at 2.94%. If you were to qualify at that rate, your monthly payments would be a much more manageable $1,652.13, saving you $301.47 per month.
Tips For Locking In Your Rate
- Do your research: Speak to all the banks and lenders to make sure that you get the best rate lock feature for an extended period with no fees.
- Have all your documents ready: This way you can quickly submit the loan application after you have locked your rate in. This minimises the possibility that the rate lock period will lapse and you may end up paying a higher market interest rate.
- Communicate with your mortgage broker: To ensure your application is lodged with the bank quickly.
- Check the term of the rate lock-in: So that you can make sure your application is on its way to being approved before your rate lock lapses.
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