Are Long-Term Mortgage Rate Locks “Worth It”?
When you buy an existing home, it’s likely that you’ll close within 60 days of writing your contract.
But, what if you’re buying new construction and your new home won’t be ready for months — or even a year! What do you do about your mortgage rate?
You can talk to mortgage lenders and get quotes for today's mortgage rates, but won’t do you much good if your closing’s not set for the near-term.
You don’t need a near-term when you’re buying new construction — you need a long-term one.
Or, do you?
Most mortgage lenders will give allow you to lock today’s mortgage rates for periods of 180 days, 270 days, 360 days, or longer. However, just because you can lock, doesn’t mean that you should.
What It Means to “Lock” Your Loan
When you “lock a loan”, it means you and your lender have reached an agreement on your loan’s mortgage rate and discount points; and the lender has put its commitment in writing.
Loan locks protect you from an increase in mortgage rates between “today” and your closing date. If mortgage rates rise, the bank can’t assign you the new, higher rate.
Conversely, if mortgage rates dip, the bank won’t assign you the new, lower rate.
Your mortgage rate lock is a contract and it’s valid for an agreed-upon number of days.
The most common rate lock period is 30 days, but many home buyers will request rate locks from the lenders of 45 or 60 days because it can take that long to close on a home.
When your loan fails to close while your rate lock is in effect, you may be subject to worst-case pricing, which means that you get the worser pricing of your original locked rate, or today’s updated rates.
It’s often best to lock your mortgage rate for the minimum number of days possible, with maybe a day or two of cushion — just in case something goes unexpectedly wrong at closing.
It’s rare, but it happens.
Longer Mortgage Rate Locks Are More Costly
Your mortgage rate lock consists of a mortgage rate and a mortgage fee, which is commonly known as .
Mortgage rates are generally unchanged for all standard rate lock lengths. However, as the length of the rate lock increases, the accompanying fee grows larger.
Consider this real-world example of how a one mortgage lender’s pricing changes for different rate lock lengths given a 30-year fixed-rate mortgage at 4.0 percent.
|Lock (days)||Fee||Cost per $100,000 Borrowed|
|75||0.38%||$380 + 0.25% upfront|
|90||0.60%||$600 + 0.25% upfront|
In this illustration, a mortgage borrower can request a 30-day lock and pay 0.09 discount points to the lender, or $90 per $100,000 borrowed.
The same borrower could request a 60-day rate lock from the lender and pay an accompanying 0.27 discount points, or $270 per $100,000 borrowed.
Same loan, different rate lock length. But, look what happens after sixty days.
Beginning with the 75-day rate lock, the lender begins to charge an additional upfront fee in order to lock the rate.
The upfront fee is meant to function like a security deposit of sorts, committing the borrower to the transaction; and, the longer for which you request a rate lock to be in effect, the larger your upfront fee.
Lenders charge the upfront fee because when they execute a rate lock, they begin to put resources and energy behind your loan. They want your commitment because, if you walk, the lender loses out. Having you pay an upfront, non-refundable fee is one way to ensure your commitment.
Are Extended Locks Worth the Money?
To determine whether an extended mortgage rate lock is worth the money, you’ll need to know a little bit about .
After all, doing an extended rate lock is really just a hedge against the future.
So, what’s the likelihood of mortgage rates soaring between now and the six or twelve months it will take until your home is ready for closing? If recent history is any indication, the chances are pretty low.
Between 2000 and 2015, looking at rolling six-month changes, there was a period during which 30-year mortgage rates spiked 96 basis points (0.96%) within six months; and a period during which they plunged 139 basis points (1.39%).
As a home buyer, you’d be nervous when mortgage rates rose but ecstatic to see mortgage rates drop. However, these shifts are at the extremes.
Rates rose more than 75 basis points (0.75%) only 3 times; and they dropped more than 125 basis points (1.25%) only 3 times, also. During every other 6-month period, rates hardly moved much at all.
Since 2000, during any given 6-month period, 30-year mortgage rates moved just 14 basis points (0.14%) on average, affecting monthly mortgage payments by just $8 per month per $100,000 borrowed.
Furthermore, if we exclude months during which mortgage rates dropped — only counting the months in which they rose — the average 6-month change in rates was just 32 basis points (0.32%).
In other words, if you used an extended rate lock anytime between 2000-2015, you probably wasted your money. It would often have been better to wait until 60 days from your closing, and to execute your rate lock at that point.
What Are Today’s Mortgage Rates?
If the thought of runaway mortgage rates makes you nervous, you’ll be well-served to execute an extended mortgage rate lock with your lender — there’s something to be said for peace of mind. If you can roll with the market, though, you find yourself coming our ahead.
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