How Does a Mortgage Rate Lock Work?

When your lender “locks” your mortgage rate, they are promising you will get that interest rate on your mortgage for a specific amount of time, typically 15 or 30 days.  Rate locks can be for longer periods of time, like 45 days, but the longer the amount of time the more it will cost you. It is up to you as the borrower to decide if you want to lock an interest rate for your loan or not. A mortgage rate lock includes the annual interest rate, fees and your monthly payment plan.

Speaking to your lender about locking your rate is especially important if you think interest rates will increase over the near term or if you are on a tight budget and a higher mortgage rate may disqualify you for your loan. 

Since interest rates can fluctuate, rate locks help borrowers feel confident that they have guaranteed themselves a rate for their loan regardless of what the economy is doing.  In other words, if you have a rate locked at 3.0% for 30 days and during that time interest rates go to 4.0%, you will still receive a rate of 3.0%. Likewise, if interest rates drop to 2.5% and your rate is locked at 3.0%, you will still have an interest rate of 3.0%.

A rate lock also puts a deadline in place for getting your loan closed.  This means the lender and the borrower have a limited amount of time to complete documentation requests, provide information and perform any other requirements. If your loan cannot be closed during the lock period then you will have to pay to extend your rate lock or be subject to the market interest rates.

You can back out of an interest rate lock, but it will come with consequences. Backing out generally means switching lenders.  You will need to start your mortgage application all over again, you’ll need to have a new credit report completed and if you paid for an appraisal you will need to pay for another one with the new lender. If you are concerned about your rate lock, it’s best to discuss your options with your current lender instead of backing out.

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The 5 Biggest Things That Affect Your Mortgage Rates

One of the most common conversations we have with clients is why their mortgage rate is different from the rates they see advertised on TV.  Mortgage rates are affected by several things which is why you probably have a different loan rate than your friends and family. The mortgage rates you see advertised on TV are rates for what lenders consider a perfect loan scenario. Most advertised rates apply to less than 5% of California mortgage loans.

In this article, we share the top 5 factors that affect the interest rate on your mortgage loan.

The 1st factor is beyond your control or your lender’s control. Factors 2-5 are considered varying levels of risk to lenders. Your mortgage interest rate is calculated in part on where you rank on these 5 factors.

First, General Market Rates.  The baseline mortgage rates are based on current interest rates set by our financial markets.  These rates fluctuate based on general economic health, inflation, the jobless rate, imports, exports, etc…

Second, Credit Scores. The lower your credit score is, the higher your mortgage loan rate.  This is because lenders consider lower credit score borrowers more risky than a borrower with high credit scores.

Third, Debt vs Income. If you earn a good income but you also owe a lot of money to personal loans, credit cards, auto loans or other obligations your mortgage interest rate will be higher than someone who does not have a lot of monthly debt payments. Lenders refer to this as your Debt to Income Ratio (DTI).  

Fourth, Loan to Value.  If your home is worth $500,000 and your mortgage loan is $400,000 then your Loan to Value (LTV) is 80%.  Someone with a 70% LTV will get a lower mortgage interest rate than someone with 80% LTV. This is why when home values are high many homeowners will refinance their home.  The higher loan value gives them more borrowing power as well as a more attractive interest rate.

Fifth, Loan Size. Every county in the U.S. has a loan limit established by Federal Guidelines.  You can still borrow more money than this loan limit. However, if your mortgage loan is equal to or less than this limit, you will get a lower mortgage interest rate. These county limits change but your mortgage lender can tell you what the current limit is for your county.

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