You may have heard the term rate lock before. Rate locks can save you thousands of dollars over the time you hold the mortgage loan, but what exactly are they and how do they work?

Mortgage interest rates are constantly moving up and down throughout the day and daily. During the underwriting and process stages of a mortgage, rates can fluctuate. Getting a mortgage rate lock is a way to keep your interest rate from moving higher before closing day.

What is a mortgage rate lock?

A rate lock, also known as rate protection, keeps your interest rate from rising between the time you apply for a mortgage and the time you close on your new loan.

A mortgage lender will set aside the necessary funds and “lock” loan terms and interest rates. In essence, think of a lock as your “RSVP”; the mortgage lender sets aside necessary funds for your transaction, and they will assume the risk of rates rising during the lock period.

Locking a rate allows clients to get the best mortgage rate possible while going through the refinancing or purchasing process. For example, if Greenway Mortgage locks in your rate at 3.5 percent for 45 days and rates jump to 4.5 percent within that period, you’ll get your loan at a lesser rate.

How long does the rate lock last?

The moment a loan is locked, the clock starts ticking! Lock periods typically last from 30 to 60 days, though in markets where the loan approval process is slow, the lock period can last as long as 90 days. The shorter the period that the lender locks a rate, the more beneficial to you in terms of the overall cost.

How does the length of a rate lock affect your cost?

In mortgage lending, almost every cost factor comes down to one variable—risk. You will generally find that the more risk a client is willing to assume, the better rates and terms a lender is willing to offer. Conversely, when a lender assumes more risk, they tend to counter that risk with higher costs. In this case, the longer a lender guarantees an interest rate, the larger a buffer they will require to offset that risk.

How much does a rate lock cost?

It depends as every mortgage lender is different. It also comes down to the amount and term of the loan. Some lenders do charge for a rate lock, though others offer one for free. But not everything is free. The fee may be included in the rate you were offered. Speak with your lender for more information.

Is a mortgage rate lock worth it?

The benefits of a rate lock outweigh the risk. If you want to protect your homebuying power, it may be worth it. The rate lock is about preventing your mortgage payment from going up due to possible rate hikes before closing. Not locking a rate can mean having to come up with a higher down payment if rates did go up. Given where mortgage rates are at today and the possibility of them going higher, getting a rate lock can pay off!

What happens if you commit to locking a loan and you do not close in that period?

Sometimes, conditions arise that delay the process, and loan locks "expire" before a lender can close the transaction. In this case, the lender will typically grant an extension on the lock period but at an additional cost. An expiring loan lock does not typically jeopardize the overall likelihood of the loan's closing.

Bottom Line

If you have a good mortgage rate, lock it. Mortgage rate locks may protect you from rising rates and give you peace of mind. Speak with Greenway Mortgage for more information. The security of protecting yourself from rate spikes is worth it.

The Federal Housing Finance Agency released its House Price Index for Q4 of 2021 and home prices were up 17.5% year over year. Your area's details can be found in my Real Estate Appreciation Data Report.

What could this mean for you as a homeowner?

1. You may be able to drop private mortgage insurance and lower your monthly payment

2. Take cash out for home improvements, debt consolidation, tuition payments, or any other purpose

When values are high, a refinance could be worth exploring.

Are you thinking of buying?

High home prices can impact affordability, as can rising interest rates. Fortunately, rates are still below historical norms and prices continue to rise due to low inventory and high demand in most areas.

Reach out to discuss your scenario before rates get any higher!

Struggling to save up for a down payment on a new home?

Saving up to buy a home can feel nearly impossible. But with a solid saving game plan, anyone can squirrel enough away for a down payment on the home of their dreams. There are many simple strategies you can use to make saving a breeze and we’ll cover those in a few.

How Much Do You Need to Save For Your Down Payment?

You’re probably familiar with the phrase: Save for a 20 percent down payment before you buy a home. Putting this much down shows that you have financial discipline and stability. Plus, it can help you get more favorable rates. While a 20 percent down payment was once a standard, many home buyers now pay 5% or less. In fact, there are some programs that allow you to put down as little as 3.5%.

Where Did The 20% Myth Come from?

The 20% myth comes from the private mortgage insurance (PMI) rule that some lenders and investors have. If you have less than 20% down at closing, you may need to pay for PMI. On the flip side, if you put 20% or more down on a home at closing, you do not have to pay the private mortgage insurance. Overall, putting 20% down will save you money over time.

What are the Benefits of a 20% Down Payment?

Lower Interest Rate

Putting 20% down vs. 3.5% down shows your lender that you're more financially stable and not a large credit risk.

Pay Less For Your Home

The larger your down payment, the smaller your loan amount will be for your mortgage. For instance, if you decide to put 20% down, you'll only pay interest on the remaining 80%.

Stand Out in a Competitive Market

The housing market is still hot, and many buyers are competing for the same home. In turn, a 20% down payment to a seller is key because you are seen as a stronger buyer then someone puts only 3.5% down.

You Won't Have to Pay Private Mortgage Insurance (PMI)

Again, when you put less than 20% down when buying a home, your lender will see your loan as having more risk. PMI helps lenders recover their investment if you're unable to pay back the loan. PMI is not required if you put 20% or more down.

3 Down Payment Game Plan Saving Strategies:

Build A Better Budget:

• You’ll want to sit down and figure out where you’re spending the most money. You may even want to download a budgeting app!

• Figure out how much you spend on necessities like rent, car payment, utilities, etc.

• Figure out how much you spend on nonessentials like entertainment, restaurants, etc.

• After categorizing your expenses, set a realistic dollar amount that you can put aside each month that you’re comfortable with. Consider these savings a non-optional expense!

Reduce Your Expenses

If you're prone to impulse shopping online, consider cutting down on those purchases! Plan to cook at home and focus on eating out less frequently!

Automate Your Savings

• Decide how much you want to save per month for your down payment.

• Contact your bank and authorize an automatic withdrawal from your primary account into a separate savings account.

•  Your bank will automatically take money out of your account each month and put it into a separate account.

Bottom Line

If you want to save for a house, you’ll want to have a solid savings game plan. Figure out how much you need to put away each month. Remember, you don’t always have to put 20% down. There are other options, and we are happy to discuss them with you.

Still have some down payment questions rolling around in your head? Contact the experts at Greenway! We'll help guide you in the right direction towards your homeownership goals.