What Do First-time Homebuyers Need to Know About A Rate Lock?

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When you shop for a mortgage, lenders will review all the information that you submit before giving you a Loan Estimate. Getting a “rate lock” or also called a “lock-in” is one of the decisions you’ll make as you compare Loan Estimates from different lenders. As a first-time homebuyer, it is important that you understand what rate lock means and how it works because it could affect the interest rate you’ll get once you decide which lender you will close a loan with.

Why you may want to opt for a rate lock?

Whether you’re buying a home or refinancing, most lenders might ask if you want to opt for a rate lock. Keep in mind though that, not all lenders offer a rate lock when they issue a Loan Estimate. Rate lock simply means that you’ll get the same interest rate, points, and lender credits specified in the Loan Estimate if you close with the lender, who provided the Loan Estimate, within a given time frame. Mortgage rates are often unstable, and a lot of factors can make it high or low when the time comes that you’re ready to close with a lender. If you opt for a rate lock and nothing has changed in your application, you’ll likely get that interest rate on the Loan Estimate you received upon closing.

You may opt for a rate lock if you think that mortgage rates might increase by the time you close with a lender. On the other hand, it may not favor you if mortgage rates become substantially low on closing.

As a first-time homebuyer shopping for a mortgage, you may encounter a Loan Estimate with a rate lock of 30, 45, or 60 days. This means that you have to decide to close the loan with the lender on a specified date or else the lender may charge you an additional cost.

*A Loan Estimate page 1 sample with a rate lock

The interest rate may change in a Loan Estimate even it is locked

There could be some situations that you’ll get a different interest rate on closing even if you requested for a rate lock on your Loan Estimate. Your interest rate might change upon closing even when it is locked for the following reasons:

  • You requested for another kind of loan;
  • You decided to change the amount of your down payment;
  • Your home appraisal didn’t match the loan amount that you’re applying for;
  • You did something that negatively affected your credit score (e.g. missed credit card payment); or,
  • The lender could not verify your source(s) of income.

Lenders take a considerable risk when they consider you for a loan. They might make reasonable adjustments to a locked rate if they later determine that approving a borrower can bring them more risk. It is important that you keep these things in mind if a prospective lender offers you a rate lock option.

Ask questions if you’re getting a rate lock

As a first-time homebuyer, you need to be aware that you’ll encounter various rate lock policies as you request for a Loan Estimate and it is important that you ask questions. For example, you may want to know the benefits a lender can provide you if you lock your rate today, and for how long you can take advantage of them once you get a Loan Estimate. Is there any additional cost if you get a longer lock rate or if you missed the closing date? What are the circumstances that could change your interest rate even if it is locked? You may even want to know what will happen to your locked rate if interest rates go down. Don’t hesitate to ask follow-up questions if there’s something you don’t understand. These will help you avoid unwanted surprises once you’re already on the closing table.

Depending on the current mortgage interest trend, getting a rate lock may or may not benefit you as a first-time homebuyer. If you’re considering a rate lock on a Loan Estimate, make sure that you can close with the lender on time so you could avoid paying an additional cost.