Interest Rates fluctuate daily. Real estate sales take 30 days or longer on average to complete. A rate lock guarantees the final interest rate of your loan. I can tell you from experience, that buyers are extremely upset when their final interest rate is higher then what they were initially quoted. Buyers feel like they got the ‘bait and switch’ tactic and it can put a real damper on the sale.
How do you avoid this? Talk to your lender as soon as you open escrow and tell them you want to lock in your interest rate!
Lenders allow you to rate lock an interest rate for 30 days or 45 days. If the escrow takes longer than usual- a rate lock can be extended.
Rate Locks are not always Free! Lenders charge you a fraction of point added on to the interest rate to lock. For instance, if you are quoted 4.5% and you want to have a 45-day lock, then the charge for your 45-day lock might be 1/8 percent higher and the rate you lock is 4.65%.
Ever lender charges differently on rate lock so it is impossible for me to tell you exactly what they will charge. The longer the rate lock, the higher the risk to the lender that interest rates will go up and the higher charge. Here is a general idea of what you can expect on a rate lock:
- 15-day rate lock: 1/8 point lower than 30-day rate lock
- 30-day rate lock: The basis for all other pricing, origination fee only.
- 45-day rate lock: 1/8 percent higher on interest rate than the 30-day rate lock
- 60-day rate lock: 1/4 percent higher than the 30-day rate lock
If you go beyond your rate lock expiration you can purchase a 15 day or 30-day extension for an additional $300-$400.
Rate Locks work both ways. If the interest rate goes up you get to keep your locked rate, but if interest rates go down you can’t get the lower rate, you are stuck with what you locked. Sometimes the bank will give you the lower your rate but don’t count on it.
Buyers who believe that interest rates or going to drop sometimes decide not to lock in their interest rate- this is called “floating”. Floaters want to keep their options open. I never recommend to my clients to float because I have seen how quickly interest rates can swing in just one week, over 1/2% once!
Mortgage Brokers get more grief from rate locks than anything else- because although they can have an idea of what interest rates will do from experience, they have absolutely no control over it- so if the interest rate goes up while their client was floating or before they lock in the rate the client will be angry that they missed the good interest rate on their loan.
I always tell clients that you have to look at the big picture, the difference of an 1/8 or 1/4 of a point in interest rate is probably less than $100 a month on the payment so it’s not a total disaster. If rates go down substantially during your ownership, you can always refinance into the lower rate. I feel like a lot of the time the whole thing is blown out of proportion because buyers become obsessed with getting the lowest rate. The best thing to do is just lock the rate right away and don’t worry about it anymore.
Rate locks are given in writing. Make sure you get a copy of your rate lock from your lender in writing. If they tell you verbally they locked the rate but they don’t send it to you in writing, they may not have actually locked the rate but were going to, and then something came up and they got busy, then they forgot…. you get the point. Only when you have the rate lock in writing will you have the guaranteed rate.