Housing Market

January 25, 2022

When Do I Need a Long-Term Rate Lock?

long term rate locks, rate locks

Since 2020, you’ve been repeatedly reminded that you’re living in constantly changing times. Good thing a long-term rate lock can help you navigate the world of ever-changing mortgage rates! So, although we can’t guarantee that your work-from-home status won’t change, we can help you stay on budget and have peace of mind from your application to closing.

What is a Long-Term Rate Lock?

A Long-Term Rate Lock protects you from changes in the market. It is an agreement with your lender that they will honor a specific rate for an agreed upon period of time, regardless of fluctuations in the market. This period can be for 3, 6, or 9 months with the goal of securing a rate from the time you apply to the time you close. For example, you apply for a loan and lock in with your lender at a rate of 3.35% for 3 months. Even if rates climb to 3.75% by the time you close two and a half months later, you still pay the lesser rate.

Don’t Break the Budget

You may look into a rate lock when a specific interest rate comes up that fits your budget. Let’s say you are planning to purchase a $350,000 home with  5% down and financed for over a term of 30 years. The hypothetical current interest rate is 3.25%, meaning your monthly payments would come in at $1,896. If you budgeted to keep your monthly payments below $2,000 then this rate is perfect. But if the market takes a hit, and rates rise three-quarters of a percent to 4%, your monthly payments spike to $2,036. Although this number isn’t totally budget-crushing, wouldn’t it have been nice to have locked in at 3.25% and saved some money?

Nailing Down a New Construction

Those who have purchased a new construction home in the past few years have faced timeline obstacles with supply and labor shortages. A Long-Term Rate Lock helps to confront some of these unknowns in the realm of new construction. With terms up to 9 months long, buyers can secure a low rate at the start of the build, which carries until the paint dries and the moving truck arrives.

Let’s Talk Logistics

Cost. When obtaining a Long-Term Rate Lock, there is usually a fee equal to 1% of the loan amount with an interest rate slightly higher than that of the market. However, many find this a fair cost for peace of mind and protection against a potential skyrocket in rates.

Fluctuations. Two main things can happen after you have secured a rate lock: rates can go up, or rates can go down. If rates go up, you’ve won the mortgage game! You stay locked into your lower rate and save. On the flip side, even if rates go down, you haven’t lost. You can still negotiate to a lower rate. 

Rate Lock to Relax

So should you lock your rate? At the end of the day, it depends on your budget and situation. But one thing that definitely comes with a rate lock is the peace of mind of knowing what you’ll pay as you enjoy your next home. If you want to break down the details, talk to our team of experts.

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