Can You Extend a Locked-In Mortgage Rate? What Borrowers Should Know
Many homebuyers find the process of applying for a mortgage unsettling and perhaps confusing. There are many moving parts, and after you submit your application, you hope everything is completed without a hitch. One of the most comforting steps in the mortgage process is locking in an interest rate. A rate lock is a commitment that the lender will deliver the percentage you are quoted for a specified period of time, usually between 30–60 days, even if the market changes. This is especially valuable in a volatile market where rates can increase rapidly, but a lock does have a limited time period associated with it. If for any reason the closing process takes longer than anticipated, you will find yourself wondering what happens when the lock expires. This is when borrowers often explore the option of extending their rate lock—paying a little more to hold that rate until the loan closes.
What is a Mortgage Rate Lock Extension?
A mortgage rate lock extension is simply an agreement with your lender where you will be able to keep your original interest rate beyond the expiration period. Think of it like paying for extra time so that deal you locked in does not disappear. The need for an extension is typically not because of anything the borrower did wrong, but rather delays that happen during the mortgage process. Often lenders take longer than expected to finish underwriting, or perhaps the appraiser is behind, the sellers delayed or moved the closing date, and/or a construction project wasn’t completed in time. In any situation, the extension allows you to keep the contract rate instead of exposing yourself to market rate pricing at the last minute.
Can You Extend a Rate Lock?
For most lenders, the answer is simple: you'll need to lock again. Some lenders allow you to lock at a higher rate if rates have gone up, but often your better bet is the extension, especially if you think you'll be closing the transaction. If rates decrease and your bank is willing to lock at that rate, you may be better off to relock as opposed to extending. The key to keep in mind is only a few lenders allow anything but the extension option; they have no requirement to stick with it once you've locked the rate. Always try to remember to follow up with your lender in a timely manner. It is advisable at least a month before expiration to see if the feature is available. A few have “recap” features; however, you typically have a priority time lock, meaning within 20 days of expiration. The best option is always to check first.
There is also an in-between option called a float-down option. With a float-down, you lock your rate, but you pay for the ability to adjust your rate should market rates fall significantly before you close the loan. Float-downs aren't free—typically there's an upfront fee, or you'll pay a slightly higher starting rate—and lenders will stipulate when you can or can't exercise them. But during periods of rate volatility, float-downs can provide reassurance as they offer the opportunity for you to benefit if the market moves in your favor.
Lock Rate Extension Fees
The cost of a lock extension depends on your lender, but the borrower should anticipate paying anywhere from a fraction of a percent of their loan amount to a fixed fee related to the number of days of the extension. If we take a $250,000 mortgage, it could potentially be the difference between a couple hundred dollars and over a thousand. Generally, the borrower pays this fee, though sometimes the lender might pay if they are the cause of the delay. In transactions of new construction, sometimes builders will share the cost (but don't assume it). Unlike interest rates, fees do not change daily, but they do vary by lender and increase with the length of the extension requested. As a rule it is good to ask regardless of how long of an extension you are requesting. In certain instances (such as a very short extension or if the lender is at fault), this fee may be waived. Never assume you know your lender’s policies—ask early, don’t wait for your lock to expire, confirm your lender’s policies.
Should You Pay For an Extension of Your Rate Lock?
In the end, whether or not it is worth paying for an extension of your loan rate lock will depend. If the rates have increased since you first locked and you are only days away from closing, the cost of an extension can sometimes be a very small amount to pay for maintaining a great loan rate that will save you thousands of dollars over the life of the loan. Conversely, if rates have fallen and you do not have a float-down feature, it may be wiser to let your lock expire and relock at the lower rate. Much will depend on the timing of moving toward closing, market conditions, and how close you are to completing the process.
The best way to avoid paying any lock extension costs at all is to be prepared and organized. Respond promptly to your lender's requests for information and documents, schedule your appraisal early, and keep the sellers and builders on track if they are involved! If delays are caused by sellers or builders, you may even be able to negotiate with them to pay for the extension cost. If you know your timeline will be longer from the start, you may consider locking for longer terms at the beginning instead of using extensions.
Extended Rate Lock Options (Long-Term Locks)
Borrowers who plan to have a “wait period” (as in not a matter of weeks, but rather months) before their purchase or construction is completed often have an option with many lenders to lock their mortgage rate for a longer-than-normal term. Extended locks could last in any range from three months out to a year, with six-month and twelve-month locks being most common for new construction. The catch is cost: the time and associated risk of having the lender guarantee your rate is reflected in the cost you must pay upfront, or the higher rate you will pay to cover the lender’s risk. These extended lock programs could add cost to the mortgage, but could be critical for buyers building a home, or purchasing during a slower-moving market. Some extended lock programs may even feature a float-down that will allow you to capture a lower rate from the original terms if market conditions offer lower rates before closing.
One more aspect of extended locks would be the value of “float-down” options in the event rates dropped from their original level, or the option to negotiate “repricing.” Repricing would change the borrower from the original rate, but without a float-down option the borrower is stuck with the original rate if the market is better. If you have a float-down option, lenders typically allow you to reprice once during the lock period, as long as the drop is significant and you are within the original window of closing.
What Happens When a Rate Lock Expires?
When a rate lock expires, your lender no longer has to give you the original rate. If market rates have increased, you might find you have a significantly higher monthly payment than originally intended. If rates have decreased, you could be in luck, but it's a bit of a gamble, and not a wise way to keep your home purchase on track. The best thing you can do is to keep your home purchase on pace and close your transaction before your rate lock expires. This will mean being proactive, which includes getting the paperwork back quickly, checking in with your loan officer, and ensuring that everyone is working together and keeping deadlines.
Most lenders will allow you to lock your rate as soon as you apply and underwriting begins. So, you do not have to wait until closing to lock in your rate. In fact, locking in your rate is often the best way to protect yourself in the uncertain weeks leading up to closing. If you do face issues and delays in closing, extensions are available at a price, so getting started on your closing as soon as possible is best!
Conclusion
Extending a locked-in mortgage rate is easy, but not free. At the end of the day, it comes down to an issue of value: do you think the benefit of retaining your original rate outweighs the cost of holding it longer? For many borrowers in a rising-rate environment, it is very likely the answer is yes. The very best course of action is to know your options, anticipate waiting times, and to be open with your lender. This will allow you to be comfortable and secure in the mortgage process and avoid surprises—last minute or otherwise—while ensuring the rate you budget for is the one you close with.
People Also Read
