Mortgage Rate Lock

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Mortgage Rate Lock

A rate lock is a commitment by the lender to reserve a specific interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is underwritten. Depending upon the lender, you are able to lock in the interest rate and number of points at time of submission, or may be required to wait until you have final approval (i.e. after the lender has received the appraisal and all condition are signed off).

Shorter loans, such as 15-year fixed, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage (ARM) may be more appealing with a lower interest rate than fixed mortgages, but your payments could rise with interest rate changes during the life of the loan.

A down payment of 20% to 35% will give you the better rates. With a down payment of less than 10%, your interest rate will be higher as less equity is more risk for the lender. If you have the cash available now and want to lower your payments, you can pay points on your loan to reduce your mortgage rate (see Buying Down the Rate). In exchange for paying up front points, lenders are willing to reduce the interest rate they charge, consequently reducing the borrower's payments. Generally, you can expect to recoup 150% of points paid to reduce the rate within 3-years. The lender will also pay all of your closing costs are other fees to get the loan, however, you will end up paying a substantially higher interest rate over the life of the loan. If you work the numbers, you are always better paying the costs at closing, unless you have no other alternative.

Other factors that affect your interest rate and terms of your loan are your credit quality and debt-to-income ratio. If you have at least a FICO credit score of 620+ and your monthly debt obligations are less than 38% of your income, you are considered an "A" borrower and will get approved at some of the better rates. If your credit score is lower or your debt-to-income ratios are higher, you will not receive as good of rates unless you have at least 680+ FICO scores and you have other options to get the better rates.