What Happens if Mortgage Rates Drop After Lock

Aug 17, 2022 | Mortgage Guides

Mortgage rates, like loans and market rates, rise and fall, thus impacting different aspects of an individual’s financial situation, such as income and loan application status. Particularly relevant are home loan applications, where the guidance of a loan officer might be beneficial. A mortgage rate lock secures a rate on the mortgage, which can be extremely helpful in managing closing costs and credit. 

But what if interest rates drop after a rate is locked? Then, you have several options.

First, let’s review what a mortgage rate lock is, how they work, and the factors that affect rates, like home loan interests, including an applicant’s credit score and overall income. It’s also pertinent to consider the current market rates on mortgages and loans. Following this, we’ll examine what to do if rates change after agreeing to a home loan or mortgage lock, what kind of information you need to gather from your loan officer, and how this can impact your debt management.

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What Is a Mortgage Rate Lock?

Working much like any lock on loans, a mortgage rate lock secures an interest rate from rising during the time between a mortgage application submission and a home’s closing. The lock considers the applicant’s home loan application details, credit information, and income, among other factors. Mortgage rate locks, also known as rate protection, work closely with market rates to help borrowers get the best interest rate possible, which can significantly impact closing costs.

However, like other loans, there are stipulations. A traditional mortgage rate lock, guided by an experienced loan officer, will secure an interest rate during the application process. This process typically takes 30-90 days. During this time, your credit status, credit score, or income changes can affect the loan application. Traditional locks can be a gamble, similar to playing the market rates. That’s why there are also different rate lock options considering varying aspects such as debt and credit card usage.

Locking in a rate on home loans and mortgages, especially after consulting with your loan officer, can be a great way to secure a rate you’re willing to pay on a mortgage. Even if market rates drop, having previous information about your credit score and understanding how your income and debt play into this can be helpful in knowing where the interest rate lands before closing.

How Does an Interest Lock Work?

A mortgage rate lock, like other loans, will depend on the mortgage, lock type, and prevailing market rates. Therefore, taking into account your income, the status of your credit score, and your current debt, including any credit cards, is crucial.

When Rates Go Up

The best case for a mortgage rate lock is when market rates, along with interest rates, income levels, and credit scores, are rising, maintaining steady control over your debt.

When Rates Go Down

Like any other loan, the worst case for a mortgage rate lock is when everything drops, including income, credit, market rates, and interest rates. If the rates drop, this can hurt those who may have just locked in higher rates under the guidance of their loan officer.

If Rates Stay the Same

If you lock in rates and the rates stay the same between the loan application and closing, keeping in mind your credit, income, market rates, and debt situation could be frustrating because rate locks sometimes cost money. Still, that assurance, with the information about credit score, income, closing costs, and outstanding debt, is worth the fee to many prospective homeowners.

Why Do Mortgage Rates Change?

Like all loans and market rates, mortgage rates may seem to fluctuate without rhyme or reason. However, economic conditions, federal fund rates, supply and demand, and mortgage-backed securities influence them. Therefore, understanding these and personal factors like income, credit score, and debt, including credit cards, is vital in managing your mortgage.

Economic Changes

If the economy is doing well, interest rates tend to rise. And, if the economy is not doing well, interest rates tend to fall. When the economy is doing well, people buy large purchases like houses and cars. Low interest rates are a way to spur people toward large purchases during tighter times.

Federal Funds Rate

The federal fund rate is the rate at which lenders, banks, and other institutions borrow money. The United States Federal Reserve changes the annual federal fund rate to influence inflation. If the federal fund rate shifts, interest rates shift.

Mortgage Demand

Supply and demand also determine the interest rates. Mortgage rates go up if there’s a demand for homes. Likewise, mortgage rates decrease if there’s not much of a need for homes. Lower interest rates encourage people to purchase homes. Banks look for maximum profit and maximum market engagement. They change interest rates to find this equilibrium.

Mortgage-Backed Securities

Mortgage-backed securities are bundles of loans and mortgages sold on the bond market. Investors who own these securities are paid every time homeowners make a mortgage payment. The price of mortgage-backed securities depends on the interest rate on the loans.

When Can Someone Lock In a Mortgage Rate?

From the moment their home loan application is finalized to five days before closing, the rate lock period, under the supervision of a loan officer, is 30 to 60 days. Once that has passed, one’s rate will move with the market rates. That is why monitoring economic indicators and your credit score, along with managing income and debt appropriately, is crucial.

Looking at interest and market rate trends during a similar season can illuminate a good locking strategy for mortgages. Still, as income fluctuations and credit scores change, markets are unpredictable. High interest rates will inevitably lead to increases in one’s mortgage payments, hitting your cash reserves hard. Taking advantage of opportunities to decrease even a fraction of your interest rate, for example, by merely a tenth of a percentage point, can potentially save someone thousands over the life of the mortgage.

How to Lock a Mortgage Rate?

To lock in a mortgage rate, like other loans, firstly, be mindful of where you are in the loan process. For instance, the number of days left until settlement may impact your decision. It is also beneficial to be aware of the current market rates to make informed decisions based on the guidance of the loan officer. You’re only able to lock in a rate once you’ve received an offer. If you’re in the business of refinancing, this step occurs after submitting the loan application and receiving a copy of your updated credit report for approval.

Next, evaluate the cost and potential savings. Typically, 30 – 60 day locks will cost you nothing. However, those people wishing to secure a rate lock extension for a more extended period should prepare to pay a fee. Long-term rate locks may range from 0.25% – 0.5% of the loan amount. If the assurance of a fixed interest rate outweighs this cost, proceed with a rate lock agreement. Your lender should explain the terms, but don’t hesitate to ask questions if you find any details murky.

‍Last, know the length of the rate lock. A standard rate lock generally expires after 30 to 60 days. Options for extension often come at an additional cost that’s worth considering. The closing process in a house purchase can stretch beyond the rate lock period. If your rate lock nears expiration, coordinate with your lender to understand the requirements for a rate lock extension. Alternatively, accept the rate offered at closing, taking advantage of potential market fluctuations.

Can I Get a Lower Rate After a Lock?

Yes, there are property-buying alternatives. One is through the float-down. If you prefer not to opt for a float-down lock, you, like many people, may cancel the application and shop around for a lender with more competitive rates.

Both of these methods come with risks and potential business benefits. Carefully considering all the options can tilt the money savings balance to your advantage.

Float-Down Options

Though a float-down lock may cost more than a traditional lock, it offers several benefits that may offset the cost of your property. A float-down provision allows you to secure a rate, but benefit from a lower mortgage interest rate should the market move in your favor. Ideally, you’ll secure the lowest interest rate available for your house.

However, the major downside is that the option may cost between 0.5% and 1.0% of the total loan. Swift fluctuations could affect both your savings and people’s decision to buy. Also, float-down locks come with specific terms. For instance, many require the rates to fall a minimum of 0.25% before activation. Securing a reasonable rate ultimately lowers the payment, but the cost can be significant for those in the house-buying business.

Should I Change Lenders After a Lock?

Switching lenders works best if you’re about to refinance, especially for those in the property business. Switching lenders while buying a home may be less beneficial. Several steps are required during a home purchase that is unnecessary while refinancing. These include additional paperwork, fees, and time that might affect the overall cost and your potential savings.

Sometimes, there’s a risk of non-approval from other lenders. Regardless, as many people do, it may be worth exploring if there’s a more beneficial option for your business or property.

Bottom Line

You can gain peace of mind through a mortgage rate lock. It can save you money over the life of your mortgage, a necessity for individuals and businesses dealing with house purchases. Securing a good rate stands to lower the payment on one’s mortgage. Yet, the cost is considerable, and savings can be affected.

When a mortgage rate lock expires, there are several options. You can shoulder the cost for an extension, accept the market rate, or explore a float-down lock option. Remember that a mortgage rate lock shields you from rate fluctuations but won’t always work in your favor. Research interest rates in your area, consult multiple lenders and weigh all the possibilities before agreeing to a lock.‍

To learn more, consult with an expert loan officer at Wesley Mortgage.

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