With all the turmoil in the markets and fluctuating mortgage rates, locking in a mortgage rate is an important step in the condo-buying process. Here's an in-depth look at rate locks and how they work.

What is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between a borrower and a lender that guarantees a specific interest rate for a predetermined period, typically ranging from 15 to 60 days. This lock protects the borrower from potential rate increases during the lock period, ensuring that the agreed-upon rate remains unchanged until closing, provided there are no changes to the loan application.

Locking in a mortgage rate typically requires a ratified contract on a specific property. This is because lenders need details about the property and the loan amount to finalize the rate lock.

However, some lenders offer "lock-and-shop" programs, allowing borrowers to lock in a rate before securing a purchase contract. These programs enable you to lock in a rate for a certain period while you search for a property. But there is a catch - these programs come with additional fees and specific conditions.

How Does a Rate Lock Work?

Once a borrower decides to lock in a rate, the lender commits to honoring that rate for the specified duration. If the loan doesn't close within this period, the borrower may face higher prevailing rates or incur fees to extend the lock. Rates are typically locked in for 30 days at no cost. If you extend it 45 days or longer, there is typically a small cost to that. It is recommended to have a lock period that extends beyond your expected settlement date, just in case there is a delay. Don’t put yourself in a situation where settlement date needs to be extended, but you will lose your lock while interest rates have jumped in the mean time.

Benefits of Locking in a Mortgage Rate

Locking in your mortgage rate offers significant advantages beyond just shielding you from potential interest rate hikes before closing. It ensures that your monthly payments remain stable, allowing for precise budgeting since you'll know exactly what your mortgage costs will be. Additionally, in a fluctuating interest rate environment, securing a rate lock provides peace of mind, eliminating the uncertainty of market volatility affecting your loan terms. This stability is particularly beneficial for long-term financial planning, as it allows you to confidently manage your housing expenses without concern for unexpected increases. By locking in a favorable rate, you maintain your ability to afford the condo you desire without compromising due to unforeseen rate changes.

Float Down Provisions

If interest rates decline after locking in, you may miss out on lower rates unless the agreement includes a float-down provision. With a float-down provision, if rates drop during this period, a float-down provision permits a one-time adjustment to the lower rate. Lenders typically have specific criteria for exercising this option, such as requiring a minimum decrease in rates (e.g., 0.25% or more) and may charge a fee for the float-down service. Why do they offer this? Because they know if they don’t, a buyer might switch to a competitor if they have enough time before settlement.

When Should You Lock In Your Rate?

Usually you want to lock in your rate as soon as you ratify a contract on a property. There might be some market conditions where a loan officer might advise you to wait a couple days. There are also times when there is significant turmoil in the mortgage markets and rates drop unexpectedly. If your loan officer sees this situation and is ‘strongly encouraging’ you to lock in, do it. Rates will change throughout the day as much as a 1/4 point in some situations.

Conclusion

Once you get a property under contract, it is best to lock in your rate right away. If you don’t an rates take an unexpected jump, you could be putting yourself in a bind and/or you might not be able to afford the place. If you lock in and the rates go down enough, most lenders offer a one time rate float down.