Key Takeaways
- A mortgage rate lock deposit is a fee paid to secure an interest rate until closing.
- It offers protection against rate increases during the lock period.
- Rate lock deposits may be refundable or non-refundable, depending on the lender.
- Lock periods typically last 30 to 60 days, with extensions available at an extra cost.
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What Is a Mortgage Rate Lock Deposit?
A mortgage rate lock deposit is a fee that secures a set interest rate for a home loan between offer acceptance and closing. This provides financial stability to the homebuyer by ensuring the interest rate remains constant even if market rates change. The lock deposit is credited back to the borrower when the mortgage funds are received. If the borrower walks away from the mortgage and lock agreement, they lose their lock deposit. The longer the lock period, the larger the required lock deposit.
Calculating a Mortgage Rate Lock Deposit
Calculating the deposit amount involves a straightforward calculation. First, find the percentage charge for the rate lock deposit, then multiply this by the mortgage amount.
Mortgage rate lock deposit=Mortgage amount∗Deposit %
The charge for a rate lock could range from 0.25% to 0.5% of the amount of your mortgage. For example, on a mortgage loan of $450,000, a 0.25% rate lock deposit would be $1,125.
Purpose of a Mortgage Rate Lock Deposit
A mortgage rate lock protects the borrower from having to pay a higher interest rate on their mortgage loan should rates climb during the period between loan approval and mortgage funding. Borrowers often wait until they have found a home to purchase before paying a deposit to lock in their rate. They do so because the time it will take to find a home and have an offer accepted is uncertain.
Typically, mortgage lenders use mortgage rate lock deposits with fixed-rate mortgages where rates move is a similar direction to the yields of U.S. Treasuries, including the 10-year Treasury note and 30-year Treasury bond.
Mortgage rates can be impacted when yields on these securities rise, either due to the Federal Reserve raising short-term interest rates or economic trends, including increasing growth or rising prices that cause bond investors to demand higher yields in anticipation of inflation.
Important
Check the loan estimate provided to you by the mortgage lender to determine if a mortgage rate lock is included and, if so, for how long. However, not all lenders offer a rate lock. So, it’s important to compare loan estimates from multiple lenders to determine the cost of the rate lock and any additional fees for extending the lock.
Example Usage of a Mortgage Rate Lock Deposit
Mortgage rate lock deposits lock in a certain interest rate on a loan, and they’re charged based on a rate of roughly 0.25% to 0.50% of the mortgage amount. For a $300,000 mortgage, for example, a deposit of $750 to $1,500 would be required.
Rate locks typically last from 30 to 60 days, but some lenders will extend a rate lock for 120 days or more. Certain lenders may offer a free rate lock for a specified amount of time but then charge fees for extending the lock. Borrowers can’t lock in a rate until after their initial mortgage approval.
Mortgage Rate Lock Deposit Limitations
Making a mortgage rate lock deposit can save borrowers hundreds if not thousands of dollars in mortgage interest in periods of rapidly rising interest rates, but the process also carries risks.
Locking in too early can cause a borrower to miss out on a better rate that may be available before closing. In addition, a borrower may be forced to pay an additional deposit to extend the lock once it expires. A rate lock can also be canceled if the borrower’s financial circumstances change before closing, such as a decline in their credit score or a rise in their debt-to-income ratio.
What Are the Pros and Cons of a Mortgage Rate Lock Deposit?
A mortgage rate lock deposit can save a borrower money if interest rates increase following the rate lock. However, if interest rates fall, the borrower misses out on a lower rate for the mortgage loan. Also, if there are issues with the application or documentation delaying the closing, the borrower may need to pay another fee to extend the mortgage rate lock.
Who Pays the Mortgage Rate Lock Fee?
The mortgage lender charges the borrower the fee for the mortgage rate lock deposit so that the mortgage rate will be locked between the offer and the loan’s closing.
Why Do Mortgage Rates Change?
Mortgage interest rates are impacted by economic conditions, inflation, and the Federal Reserve Bank. If the Fed hikes interest rates, mortgage rates tend to move higher and when the Fed cuts rates, mortgage rates move lower. The supply and demand for mortgages can also drive rates with higher demand or low supply, leading to higher rates, while low demand and higher supply to lower rates.
The Bottom Line
A mortgage rate lock deposit is used to lock in the mortgage rate for a loan before the closing, potentially saving thousands of dollars in a rising-rate environment. The rate lock also helps borrowers plan or budget their monthly payments. However, if interest rates fall by the loan’s closing date, the borrower will miss out on the lower rate due to the rate lock unless the lender offers a fee to get out of the rate lock. Some lenders may offer a free rate lock for a specific time period. Nonetheless, be sure to know the fees for initiating and extending the lock before placing a mortgage rate lock deposit.