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Rate Locks

When you decide to buy a home, one of the first important steps you take is getting approved by a mortgage lender. You will fill out the mortgage application and, in turn, receive a loan estimate from your lender. The loan estimate will show you what your monthly payment will look like for the proposed loan.

When you receive your loan estimate, it will include the interest rate for your loan. Typically, this rate is locked-in for a set period of time. Meaning that your rate is guaranteed to stay the same, as long as your loan closes within a specified timeframe – typically 15, 30, or 45 days for most lenders. So if interest rates go up within that timeframe, yours is “locked in” at the lower rate.

When would a buyer need an Extended Rate Lock?

But what happens if your loan won’t be closing in that timeframe? That’s where an Extended Rate Lock might come in. With an Extended Rate Lock, you can lock in your rate for anywhere from 60 to 120 days (or even more, for some lenders), depending on your specific loan. 

Typically, an Extended Rate Lock is used by someone who is building a new home that will take longer than 60 days before they are able to close. By locking their rate for an extended time frame, they are guaranteed that rate on their final loan and aren’t risking a higher rate later down the road. 

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What about the downsides?

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An Extended Rate Lock sounds like a great option, but there are some downsides. You may have to pay additional upfront costs in order to get an Extended Rate Lock, typically a percentage of the full loan amount. If the rates end up staying the same by the time you close, you’ve essentially spent that money for no real gain. Your lender will likely also bump up your rate by .25% - .5% in order to approve the Extended Rate Lock, costing you more money over the life of your 30-year mortgage. 

Conclusion

So while the Extended Rate Lock may be an option for some people, it may not be worth the additional costs for a conventional home purchase that will close within a regular timeframe. By working with a licensed Mortgage Loan Officer, you can determine what option makes the most sense for you and your home.

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