How Much Does a Rate Lock Extension Cost?
Understand the costs of extending your mortgage rate lock. Learn how various factors influence these fees and how to manage them.
A mortgage rate lock is a commitment from a lender to secure a specific interest rate for a home loan over a defined period. This agreement ensures the interest rate remains consistent, regardless of market fluctuations, as long as the loan closes within the agreed-upon timeframe. This protection offers borrowers stability and predictability regarding their future mortgage payments. However, circumstances can arise where the initial lock period is insufficient, necessitating an extension.
What is a Rate Lock Extension
A rate lock extension allows borrowers to maintain their agreed-upon interest rate for an additional period beyond the original lock expiration date. This mechanism is primarily used when the loan closing is delayed for reasons outside the borrower’s control. Common scenarios that necessitate an extension include unexpected delays in the underwriting process, issues arising from property appraisals, unforeseen title complications, or general postponements in the closing schedule.
An extension ensures the borrower can proceed with their home purchase or refinance at the initially secured interest rate, even if the process takes longer than anticipated. Without an extension, an expired rate lock could result in the borrower being subject to current market rates, which might be higher than their locked rate, potentially increasing their monthly payments and overall loan cost. Therefore, a rate lock extension acts as a safeguard against market volatility during the final stages of a mortgage transaction.
Factors Determining Extension Costs
Extension costs are not uniform and vary based on lender policies, market conditions, and extension duration. Lenders typically charge for extensions in various ways, such as a percentage of the loan amount, a flat fee, or through basis points. Fees might range from 0.25% to 1% of the loan principal, or be a flat fee, sometimes exceeding $500. For example, an extension might cost around 25 basis points for 15 days or 50 basis points for 30 days.
Lender policies play a significant role in determining extension costs; some lenders might offer a complimentary extension for a short period, such as five to 30 days, while others charge from the first day. It is common for lenders to charge a percentage of the loan amount, with typical rates falling between 0.15% and 0.4% of the total loan. For example, a 0.25% fee on a $250,000 loan would translate to $625 for a 15-day extension.
Market conditions also influence the cost. In a volatile or rising interest rate environment, lenders face a higher risk when holding a locked rate, which can lead to increased extension fees passed on to the borrower. The length of the requested extension directly impacts the cost; longer extensions, such as 30 or 60 days, generally cost more than shorter ones, like 7 or 15 days. This is because extended periods expose the lender to greater market risk.
The original loan amount is another determinant for percentage-based fees, as a larger loan will naturally result in a higher dollar cost for the extension. For instance, a 0.17% fee on a $1,000,000 loan would amount to $1,700 for the extension. Loan types (FHA, VA, Conventional) may also indirectly affect extension terms. Ultimately, the specific cost structure is outlined in the lender’s terms and conditions.
How to Request a Rate Lock Extension
Contacting your loan officer or lender promptly is the first step when anticipating a delay that might cause your mortgage rate lock to expire. Early communication is beneficial as it allows the lender to assess the situation and present available extension options before the current lock expires. You should be prepared to explain the reason for the delay and specify the desired length of the extension, providing any supporting documentation if requested.
The lender will then inform you of the terms and any associated costs for the extension. It is important to obtain written confirmation of the extension approval, including the new expiration date and the exact cost. This documentation serves as a formal agreement outlining the updated terms.
You may need to sign updated disclosures or agreements to finalize the rate lock extension. The typical timeline for approval can vary, but lenders usually process these requests within a few business days. Once confirmed, the extended rate lock will keep your interest rate stable, allowing the closing process to proceed without the immediate pressure of an expiring lock.