When to Lock in Mortgage Rates for VA Home Loans

By Nathan Davis

A mortgage rate lock is essential to ensure you receive the interest rate that you are quoted by a bank or mortgage lender. Often times you will be provided with a mortgage rate quote, but it means very little until it’s secured, or “locked,” by a bank or lender. When you lock in a mortgage rate, you are guaranteed that the specific agreed-upon interest rate will stay the same, assuming your loan qualifies and your application is approved. A rate lock comes with certain terms (such as fees, points, index, margins, and caps) that are locked with it.

What is a rate lock?
A rate lock (also called “lock-in”) is a written agreement guaranteeing a home buyer a specific interest rate on a home loan, provided that the loan closes within a certain period (typically 30 to 60 days). Often the agreement also specifies the number of points to be paid at closing. If you are taking out a fixed-rate mortgage, the rate that you and your lender agree upon will be locked in and will remain the same throughout the life of the loan, regardless of what happens to interest rates or inflation.

How do rate locks work?
A rate lock protects your mortgage interest rate from increasing while your loan application is being processed and, if you are taking out a fixed-rate mortgage, the lock protects your mortgage interest rate from going up for the life of the loan, even if interest rates increase.

How long do rate locks last?
A rate lock lasts as long as the time period upon which you and your lender agree. Lock-in periods of 30 to 60 days are com­mon but some lenders may offer a rate lock of only a short period of time (e.g., 7 days after your loan is approved) while others might offer longer rate locks (up to 120 days). For fixed-rate mortgages, the rate will remain the same until the loan expires or you decided to refinance.

Why is it a good idea to lock in a rate?
A rate lock is useful because it sets the terms for the mortgage and secures your interest rate while your lender is processing your loan application (which typically takes several weeks or longer). During that time, the cost of mortgages may change based on the housing stock market or economic index. But if you lock in your rate, it will not change as a result of these fluctuations. Locking in the rate gives you security and control over one of the biggest variables in a mortgage loan.

When should I lock in my rate?
If you’re not locked into a loan rate yet but you’ve received a loan estimate, you’re in what’s called a “floating” period. Use this “floating” time to track online interest rate trends, daily mortgage rate updates, and forecasts for the coming months. It’s also a good idea to consult your VA loan specialist. He or she is more attuned to the current interest rate landscape and what makes the most sense given your particular situation. You may also want to start using a mortgage calculator using a variety of interest rates, to give you an idea of what you can expect to be paying should you decide to float and interest rates rise before closing day.
In short: keep an eye on the housing market and know when to lock your rate. Make your best decision with the best information and resources available to you.

How much does it cost to lock in my interest rate?
In a VA home loan, there is no rate lock fee. It is covered, along with other accessorial items, under the flat charge of 1% of the mortgage loan amount and is separate from the VA Funding Fee. Rate locks cannot be charged to a veteran as “itemized fees and charges.” Also, the amount of time for which you decide to lock the rate in can raise the percentage of the rate overall.

What you need to know about rate locks: the pros and cons
Choosing whether to lock your rate can make an important difference in your monthly payment. Rate locks offer security and consistency in a market that is in constant flux. They also play a major deciding role in your mortgage.
Rate locks can determine which type of mortgage is best for you: a fixed-rate or adjustable-rate. Rate locks are important because the major advantages and disadvantages of these types of mortgages are directly impacted by the initial rate locks.  A fixed-rate mortgage is a mortgage in which both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan. They generally have repayment terms of 15, 20, or 30 years. The major disadvantage of fixed-rate mortgages, however, is the high interest rates. An adjustable-rate mortgage (A.R.M.) is a mortgage that does not have a fixed interest rate. Throughout the life of the loan, the interest rate adjusts according to the market.  ARMs usually have lower initial interest rates than fixed-rate mortgages. When interest rates increase, generally your loan payments increase; when interest rates decrease, your monthly payments may decrease. It is very common for the interest rate in an A.R.M. to remain fixed for a set number of years before converting to an adjustable rate.
Today, A.R.M.s offered by the VA come in the form of hybrids, which resemble both a fixed-rate mortgage and an A.R.M.  These hybrids are identified as 3/1, 5/1, 7/1 and 10/1, the first number in the ratio signifying how long the rate will be fixed before it turns into an adjustable rate mortgage. Rate locks are important not only because they secure your interest rate while your loan application is being processed, but also because they determine how much you will be paying per month, regardless of the economic index and for a good chunk of time.
While a rate lock can prevent your rate from increasing while your application is being processed, it could also prevent you from taking advantage of any rate decreases, unless your lender is willing to lock in a lower rate should lower rates become available during the lock-in period. In addition, if you do not settle on your loan within the rate lock period, you might lose the interest rate and the number of points you had locked in. Delays in processing—whether caused by you, others involved in the settlement process, or the lender—are very real risks that come with the territory, especially if the housing market is going through a phase of low mortgage rates.

Conclusion
As with all big financial decisions, do your homework and consult a professional. A few key reminders:

  • Get your mortgage rate in writing when you lock in an interest rate
  • Pay attention to any changes in the original loan terms before you close
  • Know the difference between rate lock and a rate quote
  • Know that you could be charged if you lock in your interest rate and then decide to back out of the loan.