Mortgage Rate Lock – When Should I Lock In My Interest Rate?

When Do I Really Lock In My Rate?

A mortgage rate lock helps freeze your interest rate until the mortgage loan is closed. If the monthly payment suits your budget and you are comfortable with the interest rate, you should consider locking it in.

Mortgage rates move up and down almost every single day. In fact, rates can fluctuate enough to save or cost you thousands of dollars over the life of your mortgage until the mortgage is underwritten and processed. When you lock the rate, it helps keep your mortgage interest rate from moving up before you close the deal. 

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What Is A Mortgage Rate Lock?

A mortgage rate lock is an offer by a bank or lender to make sure that you get the same rate when you are closing the deal. There might be an extra fee or the lender might include the cost of rate lock in the loan. The lock period includes the time your loan is approved by the lender until the loan is processed or underwritten or closed. There is an extended period for construction loans. Although a mortgage rate lock will protect you from higher interest rates, you will not get a lower rate if the interest rate goes down by the time the loan is closed. For this purpose, you should opt for a one time float down. 

When locked in, the interest rate of your loan will not change. But mortgage rate locks could be voided if the information in your loan application changes over time. The most important details are your credit score, property appraisal, income, or employment status. On the other hand, if there is a revision to the mortgage itself such as the type of mortgage or length, the rate can be voided by the lender. 

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When Should You Lock A Mortgage Rate?

The time to lock in your mortgage rate is after you have shopped lenders and have been approved for a mortgage loan. The loan should have an interest rate that you feel comfortable with and a monthly payment that you can afford. You should not drive yourself crazy by forecasting mortgage interest rates because they go up one day and down the next day. Even expert economists cannot predict mortgage rates with 100% accuracy since many events shape the economy, and they can impact the interest rate. 

How Long Can You Lock In A Mortgage Rate?

Mortgage rate lock periods can range from 30 days to 60 days, or longer. You should opt for a time frame that gives you plenty of time to close the deal. The ICE Mortgage Technology (a mortgage industry data provider) states that the average closing time of all mortgages ranged from 46 to 58 days in 2021. Your lender will tell you the expected time for closing. You can then add a bit of cushioning to your mortgage rate lock period. 

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How To Lock In A Mortgage Rate?

Your lender will consider a mortgage rate lock only after your initial loan application has been approved and before the document is submitted for underwriting. But mortgage rate lock policies may vary depending on the lender you choose. You can simply ask about a mortgage rate lock in case your loan advisor doesn’t mention one. You should also inquire about available mortgage rate lock periods and whether they charge any fee. 

How Does A Mortgage Rate Lock Work?

The best way to know how a mortgage rate lock works is to understand how mortgage interest rates move up and down. In fact, mortgage rates can move up and down for weeks – going up or down a notch or two and ending up right where they started. In such a scenario, you may think that the fee you paid for the rate lock is a waste. But the actual goal of a rate lock is to prevent rising rates from affecting your budget and monthly payments in the long run. A rate lock will make sure the rate stays the same in your case.  

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For example, if the interest rate goes up by the time you decide to close the deal, your interest rate is locked and you are protected. That is when a rate lock is fully worth its price or fee. On the other hand, if the interest rate goes down, you won’t get the lower rate unless you have a one-time “float-down” option on your lock.

The float-down option will let you grab a currently available lower rate. In fact, a float-down option is more often associated with new home construction loans as well as long-term rate locks. But you can always ask the loan advisor if a float-down option is available for your mortgage loan. The terms and pricing for float-down options will vary depending on the lender you choose.

How Much Does A Rate Lock Cost?

Some lenders might charge for a rate lock while others may offer one free of charge. But like any other “free” service provided by lenders, the rate lock fee will be added to the interest rate offered to you. If you have to pay for a rate lock, the fee may depend on the length of the lock in period and the term of the loan. They are measured by basis points such as 25 bps, or 0.25% of the total loan value. For example, a 0.25% rate lock charge on a $200,000 home loan would be around $500.  

Is A Mortgage Interest Rate Lock Worth It?

The advantages of a rate lock far outweigh its risks. A rate lock is not about getting the best mortgage deal but it is about protecting your home buying power. As long as you have found the best mortgage lenders and rates, the rate lock will help prevent your mortgage payment from going up because of rate hikes before the closing of the deal.

Not locking the rate could mean you have to come up with a higher down payment if the rate goes up. Just consider a $300,000 property financed for 30 years at a 4% rate with a 20% down payment. A quarter point rise in the interest rate will increase your payment by $44 a month from $1,432 to $1,476. If you decide to stay in the house for just 5 years, it will add up to more than $2,600. But the 0.25% fee to lock in the rate is only $600. 

Over the 6 to 8-week closing period, it is possible for the rate to move much more than a quarter point. On the other hand, if you don’t lock the rate, the down payment will increase as a result. If the payment increases due to higher interest rates, the lender will need more money upfront to meet its lending requirements.

Should I Lock My Mortgage Rate Today?

Ask your loan advisor for input about where the interest rates are headed and consider locking in the rate if:

. The interest rate is affordable & compares with the rates offered by other lenders

. The rate lock term is long enough to carry you through to closing

. The rates are predicted to go up

What Happens When My Rate Lock Expires Before Closing?

The rate may begin to float with daily rate movements. Talk to the lender before the lock expires and see if it can be extended. If you have responded well to the information required by the lender, the delay is not your fault, and you can request a little extra time.