Wanting to build a new home but worried about rising interest rates? An extended rate lock may be the answer for you. Extended rate locks provide an option to lock in your loan at a set interest rate for up to 270 days. This provides protection against future interest rate increases in a rising rate environment.
Extended rate locks work by charging a fee to guarantee a rate in the future. The longer the period of time for the lock is needed, the higher the interest rate and fees may be. For example, a 270-day lock will be more expensive than a 120-day lock. Many lenders offer extended rate options. When shopping around, look for programs that offer benefits that can work in your favor. Some choices are float down options and refundable deposits or upfront fees.
Float down options
This feature allows you access to a lower rate if current interest rates are lower than the guaranteed rate on your extended rate lock. Programs with float down options keep you protected if rates have risen during your lock period and let you take advantage if rates have fallen during your lock period. Generally, float down requests must be executed within 30 days of your closing date.
Refundable upfront fees or deposits
Upfront fees and deposits can average 1% of your loan amount. On a $300,000 loan, that’s a charge of $3,000 to execute an extended rate lock. That’s a considerable amount of money that could go a long way towards closing costs. For that reason, look for an extended rate lock program that will refund that fee, in the form of a credit at closing, that can be applied towards closing costs.
When selecting an extended rate lock program, estimating the length of time until your closing date and for the rate lock is key. Once the lock time expires it cannot be extended again and any upfront fees or deposits are forfeited. Work with your lender and builder to help determine the rate lock term that will be most appropriate for you.
Unfortunately, no one has a crystal ball when it comes to future mortgage interest rate levels. For buyers that are sensitive to rising rates, an extended rate lock option can provide some peace of mind during the building process.
All loans subject to credit approval.
