Should You Pay to Extend a Mortgage Rate Lock?

When buying a house, affordability doesn’t only involve the price of a property—it also involves the interest rate. Your monthly payments include repayment of principal and interest, so a low rate is just as important as the sale price.

Different factors determine your mortgage rate, such as your credit score, the amount of your down payment, and current mortgage rates.

But, mortgage rates can shift on a day-by-day basis.

Therefore, the interest rate your mortgage lender quotes at the time of your pre-approval might be different from your actual rate at closing.

A rate lock is usually enforced to protect you from these fluctuations.

However, rate locks expire. This is where you might consider an extension, which could come at a fee.

Find out if this fee is worth paying.

What is a Mortgage Rate Lock?

A rate lock freezes the interest rate on your mortgage for a certain period of time.

In other words, if you lock your rate and mortgage rates increase before closing, you’ll still get the lower rate, which saves you money in interest over the life of the loan.

Mortgage lenders offer different rate lock options including a 15-, 30-, 45-, or 60-day lock.

Rate lock extensions come at a fee

Some lenders even allow borrowers to lock their rate for up to 90 days.

Shorter lock periods are often free while you’ll likely pay extra for a lock period more than 45 days.

This fee varies but might be equivalent to a quarter percentage point of the total loan. This can add up to a few hundred dollars.

Valuable when rates fluctuate

Keep in mind that rate locks aren’t required, so you can decline your lender’s offer.

If mortgage interest rates have been stable, you may feel a lock is unnecessary since rates are unlikely to change before closing.

But if the market is volatile with rates shifting significantly in recent weeks, a rate lock offers a measure of protection and peace and mind.

A lock is also advantageous if you’re on the edge of qualifying for a certain amount.

If the slightest interest rate increase will impact qualifying for the amount you need to purchase a particular home, locking your rate not only protects against paying more interest, it also protects against a higher monthly payment which could jeopardize your mortgage approval.

But while rate locks lessen these types of headaches, locking your rate doesn’t guarantee a smooth sailing.

Issues that may delay the closing process

There are times when a mortgage doesn’t close before a rate lock expires. Of course, this wouldn’t happen in a perfect world. But buying a home is a lengthy process and delays are common.

Mortgage underwriters can become backlogged and it takes longer for them to complete loan files. Or problems with a home inspection or appraisal could delay closing.

If the home inspection revealed many problems with the property, you may have to postpone closing until the home seller can complete these repairs. Or if the property appraises for less than the sale price, you may need to renegotiate the sales contract with the seller. This can also slow down closing.

Circumstances beyond your control can also occur, such as a job loss in the middle of the mortgage process. Losing your job may not jeopardize the home loan if you’re able to find a new job in the same field earning the same money.

Even so, the lender must verify your new employment and salary before proceeding. All of these situations can delay closing, resulting in possibly missing your rate lock deadline.

Limited window to request an extension

If your deadline is approaching and you know you won’t close in time, you have two options: Let the rate lock expire and accept the current market rate on your mortgage. Or ask for a rate lock extension.

If you choose the latter, make sure you request this extension before the original lock expires.

Is a Rate Lock Extension Fee Worth It?

When closing delays are due to lender fault, borrowers aren’t typically required to pay for an extension.

But if you’re unable to close on time for other reasons, your lender may agree to an extension if you pay a fee. This fee may be as little as half a percentage point of the loan up to one percent of the loan.

If your mortgage lender doesn’t waive this fee, you must decide whether the cost is worth the extension.

The extension fee is added to your closing costs, which you’ll pay out-of-pocket along with your down payment. So consider whether you’re in a financial position to pay more at closing. Before making this decision, set up a time to discuss current mortgage rates with your lender.

If current rates are lower or roughly the same as your locked rate, it might be safe to let your rate lock expire and pay the current market rate on the mortgage. Even if mortgage rates have increased since your rate lock, this increase may only cause a slight bump in the monthly payment.

As a rule of thumb, only let your lock expire when you’re scheduled to close within days of the expiration.

If you close weeks later or a month later, rates could shoot up by then and you’ll end up paying more in interest.

Example: Let’s say you previously locked a 30-year fixed-rate mortgage at 3.9% for a $200,000 mortgage.

With this rate, you’ll pay about $943 a month (excluding homeowner’s insurance, taxes, and mortgage insurance). If you let your rate lock expire and pay the current market rate of 4.2%, your monthly payment increases to $978—an extra $35 per month.

Now, let's say your lender charges half a percentage point to extend your lock. In this case, you’ll pay $1,000 on a $200,000 loan to keep the same mortgage rate.

Letting the rate lock expire and paying an extra $35 per month might sound better than paying an extra $1,000 in closing costs. However, keep two points in mind. Closing costs are one-time fees whereas mortgage payments are paid monthly.

So yes, paying more at closing is an inconvenience. But in the above scenario, extending the lock is easier on your bank account in the long run and saves about $12,600 over 30 years ($35 x 360 months).

Before saying no to a rate lock extension, do the math and determine the most cost-effective solution for you.

If you consider the big picture, the fee to extend a lock will likely be the cheaper alternative.

Tips for Locking Your Mortgage Rate

But while a mortgage rate lock can protect your low rate and help you save money, you’ll only save money if you lock your rate the right way. Here are a few tips for success:

1. Don’t lock too early

You can lock your mortgage rate anytime after you’re pre-approved for a home loan. But since there’s no way to know when you’ll find a home, many lenders recommend not locking until you have a signed purchase agreement and a closing date.

If you can, hold off locking for as long as you can. The longer you wait to lock, the less likely you’ll deal with a lock expiration.

But since there’s no way to know when you’ll find a home, many lenders recommend not locking until you have a signed purchase agreement and a closing date.

If you can, hold off locking for as long as you can. The longer you wait to lock, the less likely you’ll deal with a lock expiration.

2. Select a longer lock period

Even though it is ideal to wait until you have a firm closing date before locking, sometimes it makes sense to lock earlier. Maybe there’s been an unexpected drop in mortgage rates and experts predict rates creeping up soon. To help secure a low rate, you can lock soon after getting a mortgage pre-approval.

Maybe there’s been an unexpected drop in mortgage rates and experts predict rates creeping up soon. To help secure a low rate, you can lock soon after getting a mortgage pre-approval.

But instead of choosing a short 30 or 45-day lock, select a 60 or 90-day lock, especially if you’ve yet to find a property. Again, you’ll pay a fee for a longer lock.

However, this fee is a small price to pay if you’re able to get a lower rate, lower mortgage payments, and avoid fees to extend your lock.

3. Ask about a float down option

If you’re worried about mortgage interest rates decreasing after locking your rate, ask your lender to include a float down option in your lock agreement.

With the float down option, the lender allows you to take advantage of lower rates during your lock period. If you exclude this provision from your agreement, the lender may not offer the lower rate.

4. Discuss rate lock fees when shopping for mortgages

What’s interesting is that rate lock fees are considered “junk fees.” These fees are controlled by the lender, and they’re another way for your lender to make money. In most cases, lock fees are negotiable and vary by lender.

Ideally, you should get rate quotes from at least three mortgage lenders when buying a house. As you shop around and compare mortgage rates, don’t forget to compare rate lock fees. This includes fees for choosing a longer lock and fees for extending a lock.

Conclusion

Getting a low mortgage rate saves you money on a home purchase.

However, rates are extremely unpredictable. If you’re worried about your mortgage rate increasing significantly between the time you apply for a home loan and closing, a rate lock is one of the best ways to keep your rate the same and your monthly payment within an affordable range.

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