What is a 'Rate Lock' and Why is it so Important?

When you're purchasing a home, especially if you're taking out a mortgage to do it, it's critical that you develop a full understanding of the process. One important element of the process? Your rate lock. Obtaining a rate lock on your mortgage is one way to be sure that you'll be able to sustain your financial situation throughout the life of the loan.

What Is a Rate Lock?

Your rate lock is a commitment by your mortgage lender that you will pay a specific interest rate for a specific length of time. Often, this rate lock is secured even before you find the home that you'd like to purchase. A mortgage lock allows you to secure your mortgage for that rate when you're ready to move forward with the home buying process. 

When Do People Lock In Their Rates?

Most people wait to lock in their mortgage rates until they're ready to purchase a home, since extending the rate lock can be costly. Often, lenders are reluctant to lock in a mortgage rate until they have all the details of the loan: the home that's being purchased, the buyer's debt to income ratio, and the buyer's credit score, among other important pieces of information. They may also need to make an offer on a home and have it accepted before they can move forward. Ideally, you'll want to lock in your interest rate shortly before you know your loan is set to close. In the case of rapidly rising interest rates, however, many people choose to go ahead and lock in their mortgage rate when they're ready to start the home buying process.

How Long Do Rate Locks Last?

In many cases, rate locks last for a comparatively short period of time. They're typically contracted at 30, 45, or 60 days, depending on the company that you're using. Some companies are willing to extend their locks for as much as 90 days; others prefer to offer locks for as little as 10-15 days. Note that you may end up paying more for a longer mortgage rate lock: often as much as one percent of the loan may be built into a longer extension. This timing, however, can help you set your loan in place earlier in the process. 

Why Are Rate Locks Important?

When mortgage rates drop to a low, but without a guarantee that they're going to stay there long-term, a rate lock is a great way to be sure that you'll end up paying the lowest possible amount for your mortgage--even if you aren't quite ready to take out your loan and purchase a home yet. This can be very helpful if:

• You know mortgage rates in your area are volatile, and you don't want to end up paying more for your money.
• You know that rates in your area are unpredictable, and you don't have a good feel for the market.
• You know that you're going to be purchasing a home in the immediately foreseeable future and you want to have a good idea of the rate that you'll be paying throughout the lifetime of the loan. 
• You want to know exactly what you'll be paying for your mortgage so that you can institute long-term planning to make the most of your loan, ensuring that you can arrange your finances appropriately. 

If you need more financial advice or are ready to move forward with securing your rate lock, contact us! Our financial experts, like Philip Mancuso, are standing by to help you learn more about your financial needs throughout the home buying process as well as many other aspects of financial management.