As soon as your real estate offer gets accepted, you notify your lender with the relevant ratification documents and lock in a rate. The rate lock is usually for 30 – 60 days. However, sometimes things take longer than expected and you need to get a mortgage interest rate extension.
A mortgage interest rate extension is also sometimes called a rate lock extension. A mortgage interest rate extension can sometimes cost money, so beware of taking too long to buy your property.
A rate lock is a guarantee assuring that a mortgage lender will honor a specified interest rate at a specific cost for a set period. If mortgage rates go up during the rate lock, the lender will still keep your mortgage rate the same. If mortgage rates go down during the rate lock, you can ask for a new rate lock.
Given the rate lock is usually only for 30 – 60 days, there is pressure on borrowers to make sure they close on homes before the rate lock period expires. If it's looking like the property will not close within the initial rate lock period, you may need to pay a mortgage rate extension fee.
Mortgage Interest Rate Extension Fee Explained
The mortgage rate extension fee is based on a percentage multiplied by the size of the mortgage amount. The percentage fee ranges usually between 0.15 percent to 0.4 percent. The percentage fee declines the higher the mortgage amount. If it doesn't, find another lender.
Rate Lock Extension Example #1
Let's say you take out a relatively small mortgage of $100,000 with a 30-day rate lock. You run into delays and need a mortgage rate extension. Your lender charges a 0.35 percent fee. Therefore, the mortgage rate extension fee equals $100,000 X 0.35% = $350.
If you have a choice, you must now weigh the cost of the mortgage rate extension fee to the benefit of getting a rate extension. Perhaps during the rate lock period mortgage rates increased, causing you to pay $50 more a month for at least 120 more months.
In this scenario, paying $350 for a rate extension fee is way better than paying $6,000 more in interest.
Rate Lock Extension Fee Example #2
Let's say you take out a jumbo loan for $1,000,000 with a 45-day rate lock. You're ready to close on the 40th day but your dear Aunty Sally gets sick with COVID-19. You need to go visit her in the hospital for a week. You request a mortgage rate lock extension.
Due to the larger mortgage amount, your bank charges a 0.17 percent fee. Therefore, your mortgage rate extension fee equals $1,000,000 X 0.17% = $1,700.
Although it's painful to pay the $1,700 rate extension fee, it would be more painful to not be there for your Aunt Sally. She always looked after you growing up because both your parents were never home. She is like a second mother.
Related: All The Fees In A “No-Cost” Refinance
How Do You Get A Mortgage Interest Rate Extension?
To get a mortgage interest rate extension, you simply ask your lender for one before the deadline. Explain the circumstances for why you need an extension. Any lender who still wants your business will likely grant you one.
The lender shouldn't mind granting a rate extension. If you have to pay a mortgage rate extension fee, then that's even more profit for your lender. You might even refer your lender to several friends, thereby potentially increasing your lender's business even further.
Once your rate lock extension is granted, you usually have another 30 – 60 days until you will either have to ask or pay for another rate lock extension or cancel your transaction.
Before entering a rate lock with a lender, you should ask what the mortgage rate extension fee will be if one is necessary. Also ask for the length of the mortgage rate lock extension so you can plan accordingly.
Mortgage Interest Rate Extension Fee Example
Below is a final refinancing closing statement. I've highlighted the mortgage interest rate extension fee example, which is also called a rate lock extension.
The mortgage interest rate extension fee in this example is $875.89. It is charged to the borrower (debit), not the lender.
A Mortgage Rate Extension Is Sometimes Free
Sometimes you won't even have to pay for a mortgage rate extension fee. You won't have to pay if it is determined that the delay was caused by the lender.
For example, perhaps your lender's underwriting department requires more documentation than normal, like during a pandemic. Your mortgage officer said you'd close within the 30-day rate lock. However, the underwriting department, which is not controlled by the mortgage officer, has other plans.
On the 29th day, the underwriting department asks you to submit documentation for a $10,000 payment that appears in your last month's checking account statement.
The only problem is the vendor went bankrupt and is hard to get a hold of. Because it will take at least a week for you to get a written proof of payment, you request for a mortgage rate extension.
Because of this last-minute request by the underwriting department, you can ask the mortgage officer to waive the mortgage rate extension fee. After all, you had submitted all the required documentation and were ready to close on time.
As a result, the lender may agree to “pay” for the mortgage rate extension fee. I put pay in quotes because the lender is not paying anything at all. It's just not charging you the fee due to its own delay.
Reasons Why You Would Need Or Want A Rate Lock Extension
We've already discussed some reasons why you would need or want a rate extension. Here are even more reasons:
Delays By The Seller
- Sellers ask to delay closing beyond the agreed upon closing date. This happens all the time as sellers may need more time to buy a new house or rent a new house. Maybe the seller's employer has asked the seller to start work at a new location at a later date. As a buyer who really wants the house, you want to be accommodating.
Delays By The Buyer
- You are having a difficult time getting all the documents requested by the underwriter. The more complicated your investments and/or your business, the more documentation is required. Sometimes it is out of your control how quickly other institutions can get back to you.
- It's taking a longer than anticipated for you to get your funds together. If you are trying to sell a relatively illiquid asset to raise funds, delays can easily happen.
- You need more time to organize the moving process. You've got to call movers, set up cable and internet, schedule a handyman to put up all your artwork, and pack your things. Maybe there's a long waiting list to get movers and the only time they can agree to is after your rate lock is over.
- You're having second thoughts and need more time to think about the purchase. A home will be one of the most expensive purchases of your lifetime. As a result, it's natural to feel nervous before a purchase. The more time you have to think it over, the better you may feel.
- You're wisely trying to sell your house first before taking on a new mortgage. Carrying two mortgages would put too much financial strain on your family. However, it's taking longer to sell your house.
Random Reasons For Delay
- You change your mind about taking out an ARM. Instead, you get a 30-year fixed rate mortgage because the rate is attractive.
- You might be waiting to hear if you will get a promotion and a raise. Perhaps you got into contract partly because you anticipated a promotion was right around the corner. But for some reason, your manager delays announcing the annual promotions. You want to make sure you actually get promoted before going through with your home purchase.
- You don't want to sell an investment too soon to help fund your down payment. Let's say you've got $100,000 in Tesla stock. You think the company will beat earnings and go up 10% as a result. Instead of selling before the announcement, you're willing to pay the mortgage rate extension fee of $1,000 for the chance to make $10,000 more.
- A pandemic and shelter-in-place orders may have created a backlog of work for everybody involved in your mortgage procurement process.
The Lender And Title Company
- The title company has the ownership structure or names wrong.
- Your underwriter wants even more documents to analyze your loan.
Life Happens: A Mortgage Rate Extension Is Common
Before the pandemic, the average length of time it would take to close on a property was about 50 days. Post pandemic, the time to close on a property is likely closer to 60 days.
There are so many moving parts and people to depend on to close a real estate transaction with a mortgage. Therefore, asking for a rate extension is quite common.
Both the seller and the buyer should be understanding that delays can and will happen. If both parties want to get the transaction done, then more time is sometimes needed.
As a homebuyer, one of your goals is to not pay for a mortgage interest rate extension fee. You can improve your chances of having the lender pay the fee by always being responsive and getting all the documents you can in a timely manner.
Remember, the lender wants your business. If it decides to charge you a mortgage rate extension fee after you've been super responsive for weeks, you might decide to take your business elsewhere.
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1 thought on “Mortgage Interest Rate Extension: The Cost And Why You Might Need One”
I’m sure there are many people who’ve gone through the process and not realized their rate has an expiration date and that they could request an extension. So thanks for raising awareness on this especially on checking if there’s a fee and figuring out if it’s worth the cost.