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How a “Lock and Shop” Could Reduce Your Total Mortgage Costs

Whether you are an experienced buyer or searching for your first property, you may have come across a unique term, one that is becoming more and more popular in the mortgage industry. “Lock and shop” is gaining traction as a loan strategy, but what is it, and how does it impact your purchase process?

If you are entering the real estate market, it helps to understand this term. A lock and shop, after all, could be perfect for your next purchase.

What is Lock and Shop?

With the typical homebuying experience, you would start the process by getting pre-qualified or pre-approved for a loan. This is an important step, as it shows sellers that you are capable (assuming the information is accurate and nothing changes) of making a purchase.

Pre-qualification gives you a basic framework for your would-be loan, outlining details such as the likely payment amount, loan total, and terms. However, the interest rate is not included. That little bit of information will be decided when you have a purchase offer accepted and finalize the official loan. The interest rate, in most cases, is determined after you shop for a house.

A lock and shop, also known as a “lock and look” or a “rate lock” works in a slightly different process. While many other factors are similar, this process essentially freezes your interest rate from the very beginning.

Basically, the rate on your potential loan is locked in for a certain period, usually about 60 to 90 days. If you can find a home and make the purchase within that time, and if the main factors of your income are accurate and don’t change, the lender guarantees to honor the interest rate.

How Does it Work?

The process for a lock and shop is quite simple; it’s really no more complicated than the “traditional” process. You will simply meet with a lender and go through the pre-qualification or pre-approval process. You’ll provide the lender with basic financial information, including income and debt numbers, and the lender will issue pre-qualification or pre-approval letter.

The only difference is that they will also provide an interest rate. You’ll be essentially guaranteed that if you can find a reasonable home in the allotted time, you’ll have a specific interest rate.

Benefits of a Lock and Shop

Why does this matter? Why is it important to have your interest rate set before you go shopping? There can be a few other benefits, but the most substantial benefit for using this process is that you are no longer at the mercy of changing interest rates.

If interest rates increase between meeting with the lender and finally purchasing a home, you will not have to pay the higher rates. This can be extremely important for housing affordability, especially in a time when interest rates are increasing. Locking in your rate, and being able to shop for a home without concern that you will pay a high interest, is far and away the top benefit for this loan program.

But it can also help speed the mortgage process. With a lock-and-shop loan, many of the steps for finalizing a mortgage are already complete. So when you find a home and make an offer, your offer could be more enticing, since sellers are generally looking to sell the property as quickly as possible.

Requirements for Lock and Shop

Lock-and-shop loans usually need to be a government-supported mortgage like an FHA or VA loan.

The requirements for these loans will vary by the lender and the organization, but there are a few specific requirements you should expect. Most importantly, the loan will likely need to be a conventional, FHA, VA, or USDA loan. This is because these loans have greater stability and support, so lenders are generally more comfortable making adjustments and taking risks. With one of these government-supported loans, they can be more flexible when locking in rates.

In our case, the loan will use our FastTrack system to increase speed and efficiency. This is an important aspect when finalizing the loan.

What if the Rate Lock Expires?

With a lock and shop, you are guaranteed to have a specific interest rate for a certain period. But what if you get a rate locked in, shop for home, but can’t find a property to purchase? What if all of your offers are rejected and your locked-in rate expires?

First of all, your lender may be able to extend the locked-in rate. It’s entirely possible that they could extend the allotted time, and if market factors have not changed you could proceed with the same interest rate.

There could, however, be a rate extension fee. This fee won’t be massive, but it could impact your budget. If rates have gone up, it could be worth the fee to have your rate extended.

Rates Could be Increasing Soon, So Lock in Your Rate Now

The lock-and-shop process is most beneficial when there is a good chance that interest rates will increase. By most accounts, there is a strong indication that rates will be increasing soon, so it may be best to lock in a rate as soon as possible.

MSN, for example, has reported that the Federal Reserve recently increased interest rates, and there is a strong chance that interest rates could be increasing again soon. On Wednesday, May, 4th, the Federal Reserve increased its benchmark rate by a half a point, a move that is intended to cool ongoing inflation. This rate is noteworthy, but Fed Chair Jerome Powell indicated that another half-point increase could be on the horizon.

If you are starting the search for a home, make sure you get the best possible interest rate. Contact our staff today and ask about our lock-and-shop program. We’ll make sure you have a locked-in rate so you can search for a property with confidence.

From experience homeowners to first-time buyers, we are here to help you have the best experience possible!

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Chad Baker, CrossCountry Mortgage   
NMLS# 329451 | CCM NMLS# 3029