Locking in Long Term Mortgage Rates

Shop around for the best long-term rate lock when getting a mortgage

Long-term rate locks are a way for borrowers to add a degree of certainty to a very uncertain situation. Long-term rate locks are a very useful mechanism when purchasing a new - by new we mean new construction - home.

Builders do not always provide a firm date that a new home will be available to the buyer. They will sometimes give a date range, but will seldom provide a firm closing date. This is because builders have to deal with construction schedules and all that they entail; delivery of materials, weather concerns, timeliness of trade people in finishing their work, etc.

While all of this is going on, both buyer and seller share a worry about rising interest rates. The solution is to lock in a long-term rate. Before locking in a long-term rate, you should look around to make sure that you are getting the best rate.

Builders often have affiliated lenders or even their own in-house financing. They will give various incentives - some would call it pressure - to get you to use their lender. Beware: Some lenders incorrectly price rate locks.

A rate lock is the lender's promise that the interest on a mortgage won't exceed an agreed upon rate if the loan is closed by a certain deadline. The standard length for a no-fee rate lock is 30 days. Fees begin to kick in for locks beyond 30 days. If you lock in an interest rate at 5.75 percent 21 days before closing, and rates rise over the ensuing three weeks, your mortgage interest rate will remain 5.75 percent as long as the loan closes on time.

Locks beyond 30 days are done for a fee. These fees vary and you shop for the best deal. Mortgage brokers are very useful for both finding the best interest rate, but also the best lock in rates for their customers. Extended lock in periods are normally capped, meaning that if the interest rate today in 5.75 percent and you lock in for 90 days, the most you would have to pay might be 6 percent (each lender is different).

An added bonus with many long-term locks is that they have a float-down option. This means that if you lock in at 5.75 percent today, and the interest rate goes down, you can still lock the lower rate before closing. Be sure to ask your lender about this very important lock in option.