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How do Mortgage Rate Locks Work? (And When To Float)
If you’ve been mortgage shopping, you’ve probably seen a lot of interest rates – some lower than others. You’ve probably also been following news reports about the recent increase in rates, and even though rates are still near record lows, it’s pretty obvious that now is the time to take out a new mortgage or refinance an existing one.
Of course, once you do decide to apply for a mortgage, it takes time – usually a few weeks – before the mortgage will be finalized. At the end of that time, you want to be sure you end up getting the same low rate that was in effect when you submitted your application. The way to do that is by locking in your rate, and maybe even your points.
What’s a rate lock?
Simply put, a rate lock – or a points lock, for that matter – ensures that the rate and number of points you were quoted when you applied for your mortgage will still be in effect when you go to settlement. Not all lenders allow borrowers to lock in rates or points; of those that do, some lenders allow you to lock in your rate and points when you file and some allow you to lock them in during the application process. Typically, most borrowers prefer to lock in their rate and points when they submit their applications- especially in a market when interest rates are more likely to be rising (as they are now).
That said, just as a lock protects you from potential rate increases while your loan is being approved, it can also mean you are unable to take advantage of decreases in the interest rates that may occur while your loan is being processed.
Floating rates and points
In a market where you aren’t sure whether rates will fall or not, you might choose to float your rate. That means that although you lock in the rate when you make an application, the lender will adjust the rate to any lower interest rate that occurs while your application is being processed. Of course, if rates rise, in most cases the rate will “float” upward with them. Since points also typically fall with interest rates, some lenders also allow points to rise and fall during the application process.
Tip: Always ask to have the terms of your lock-in provided in writing, not over the phone. If discrepancies occur, you want to be sure you have everything in black and white. Review the agreement carefully before signing to avoid unpleasant surprises at closing.