The chances of the interest rate of a mortgage loan increasing are high, especially when inflation rises or economic growth is affected. To ensure your interest rate remains the same, you can leverage a mortgage rate lock. A mortgage rate lock helps lock your rate for a certain period. But what if the lender decides to change the interest rate after locking? Is it even possible?
A lender can’t change interest rate after locking, provided your home loan closes by the agreed-upon date. However, the rate lock can be invalid if the information provided on your application changes, like the property appraisal or your credit score, income or employment, etc.
Mortgage loan locking is beneficial for individuals who want a guaranteed interest rate for a certain period. However, while this initiative is beneficial for mortgage loaners, there is the concern that lenders may back out of the agreement and alter the interest rate. Below, I have highlighted the possibility of this occurring.
Can a Lender Change the Interest Rate After Locking?
To understand if a lender can change interest rate after locking or not, let’s take a good look at what mortgage lock is first.
A mortgage rate lock is an offer by a lender to guarantee the interest rate of your loan for a certain period. The lender may charge an additional fee or include the cost of the rate lock in the loan. The lock period usually extends from the first loan approval, via processing and underwriting, to loan closing. But, it can be a prolonged period for construction loans.
Once locked, the loan’s interest rate becomes unchangeable, preventing changes to your application details. So you are safe from a higher rate, but you won’t get a lower one either unless you have the option for a one-time float down.
Rate locks can be annulled if the information stated on your application is altered, such as the property appraisal, your credit score, income, or unemployment, or there is a revision to the loan itself, like length or type of mortgage.
Why Do Mortgage Rates Change?
Mortgage interest rate changes are affected by the market. Here are some of the factors that determine interest rates.
- Economic changes:
When the economy is doing fine, interest rates rise. But when the economy slows, market rates normally plummet in anticipation that lower interest rates will encourage growth.
- Federal funds rate:
The federal funds rate is the rate at which banks and other financial institutions borrow money. The Federal Reserve regulates the federal funds rate, which affects mortgage interest rates. To manage inflation, the Federal Reserve influences the federal funds rate. This, in turn, will influence falling or rising interest rates, especially short-term rates (like credit card rates and adjustable mortgage rates).
- Mortgage demand:
Supply and demand also play a key role in mortgage rates. If there is a huge demand for homes, interest rates tend to soar. On the other hand, if the demand decreases, rates come down to spur more demand from potential buyers.
- Mortgage-backed securities:
Mortgages are often merged with other loans and sold to investors on the bond market as mortgage-backed securities. In return for purchasing the securities, investors are paid each month when homeowners make their mortgage payments. The price at which these securities sell depends on the interest rate you pay on your home loan.
In 2022, many of these factors are likely to increase the rates. As a result of the COVID-19 pandemic, with steady demand for housing and announcements that the Fed may raise interest rates to fight inflation, mortgage rates have already started to rise from their historic lows. Locking in now could still give you a low rate before the market increases.
Is It Possible for a Lender to Change the Interest Rate After Locking?
A lender cannot change the interest rate after locking. A mortgage rate lock is an agreement between you and your lender. If your home loan closes by the agreed-upon date, your lender cannot alter your rate even if current rates suddenly rise.
This offers borrowers peace of mind. Once you have locked it, there won’t be any surprise increase. But, the agreement is both ways. If rates suddenly plummet, you can’t just abandon the rate lock and expect your lender to give you a lower interest rate. Put differently; you cannot unlock your rate after locking. But there may be ways to back out of a rate lock if the interest rate plummets greatly.
Should You Lock Your Mortgage Rate?
Many borrowers aren’t sure if they should lock their mortgage rate or wait until their closing process begins. Locking it is ideal if you aren’t happy with your rate when you get approved. It’s best to lock your rate when you aren’t comfortable with the amount of your monthly mortgage payment.
If you are thinking about floating your mortgage rate, ensure you consider the effect a higher rate may have on your pockets. Even a little rise in the rate can add hundreds of dollars to your mortgage payment annually. On the other hand, locking your mortgage rate offers security in knowing how much you’ll pay per month.
While locking your rate can save you money in the future, you should also contact the mortgage lender beforehand to learn if there are any charges attached to this option. Some banks and financial institutions charge rate lock fees, depending on your mortgage type. You can pay this fee upfront or add it to your closing costs.