What should FHA home loan applicants know about the practice of mortgage interest rate lock commitments? This is an important detail of your home loan and it’s best to know how the interest rate lock agreement works ahead of time so you know how and why this part of the mortgage loan process works.
What Is An FHA Mortgage Loan Interest Rate Lock Agreement?
An interest rate lock protects a borrower from the daily mortgage rate fluctuations that happen naturally due to investor behavior, or other market forces that can change rates. An interest rate lock commitment is not automatic; it must be formally agreed to in writing between the borrower and the lender.
An interest rate lock commitment does exactly what it sounds like it does-the lender and borrower agree to lock a specific interest rate for a specified period of time during which the rate will not move higher or lower.
You won’t get burned by a suddenly higher interest rate if you choose to enter into the agreement with the lender-as long as the agreement does not expire before closing day (see below).
What Happens If My Interest Rate Lock Expires?
Sometimes the closing date you expect is not the closing date that actually happens; if your rate lock expires before your closing date for one reason or another you may be able to pay for an extension of the lock, but if the rate lock is permitted to expire you may at that time be at the mercy of the interest rate fluctuations the rate lock is designed to protect against.
Does The Rate Lock Cost The Borrower Money?
Lender practices vary, but FHA loan rules in HUD 4000.1 permit the lender to charge a fee for an interest rate lock provided that agreement meets FHA standards.
According to HUD 4000.1, “The Mortgagee may charge the Borrower lock-in and rate lock fees only if the Mortgagee provides a lock-in or commitment agreement guaranteeing the interest rate and/or discount points for a period of not less than 15 Days prior to the anticipated closing.”
Some lenders may not charge for an interest rate lock if the lock is for a lender-specified period of time and no longer.
Given That I Might Have To Pay For A Mortgage Rate Lock, Am I Required To Lock In The Rate?
FHA loan rules and lender requirements are not the same thing, but in general a borrower may choose to “float” rather than lock. As long as the borrower floats, or chooses not to lock in an interest rate with the lender, there is always a danger of market forces or other factors pushing interest rates higher.
The risk is the borrower’s, and the borrower must choose.
How Long Is The Rate Lock Good For?
Aside from the rules quoted above, there is no minimum lock-in period required by FHA loan rules. Some lenders may not permit a rate lock for fewer than 30 days, or they may require the borrower to be within a certain range of the closing date. Borrowers may find that the longer they try to get the rate lock period to last, the more it may cost.