​​When Should You Lock a Mortgage Rate

When is the Best Time to Lock a Mortgage Rate?

Every little point counts when it comes to mortgage rates. A quarter of a percentage doesn’t seem like much, but it can mean paying thousands more in interest paid or not paid over a 30-year mortgage. When the rates seem to go high, it is important for borrowers to pay more attention to the rate quote and take advantage of a rate lock.

The first step in seeing what you can afford is by checking your rate and closing cost options. It takes less than 30 seconds to see all your options.

mortgage rate

What is a Mortgage Rate Lock?

This is where the interest rate of a mortgage loan is locked, usually for a fee paid that you pay when agreeing to the terms of the loan. The lender is going to guarantee that the borrower is going to retain the rate offered for a given period (there are some exceptions). When a borrower has a rate lock, they don’t have to worry about the rate going up between when they submit their offer and close on the property.

Rate locks can last anywhere from 30-60 days, but there are times when they can last for 120 days or more. Lenders can offer free rate lock for a given period. When the period is done, they can start charging fees for extending the lock.

How Does Rate Lock Work?

When you have a mortgage rate lock, it is going to protect you from the changing interest rates. Even if the rates go up, your previous quote is going to remain and this means you get a lower interest on your loan.

If you lock the rate and the interest rate goes down, you are going to miss the chance of getting the lower rate. If you want to avoid that, consider the “float down” option when locking your rate. This option is going to let you get the lower rate if the rates go down.

What is a Float-Down Rate Lock?

There are lenders offering borrowers a rate lock with a float-down option. When the interest rate goes down within a given time after approval of the loan, you are going to end with a lower rate. If the rate goes up, the quoted rate is going to be used.

You have to consider this option carefully because there is a cost. Rates might not move how you expected, and that means you can end up paying higher rates for the loan or spend more money on points you aren’t going to see again. 

When Should You Lock Your Rate?

You cannot lock the rate until your loan has been approved – and you sometimes have to worry that you might miss the opportunity for a better rate by locking too early. You might be worried that you have to pay more to extend the lock if it expires.

It is going to cost more to get a longer lock. Someone who chooses a 30-day lock on a fixed-rate 30-year loan might have to pay zero points and a 4 per cent rate, while a 60-day lock on the same might cost 1 point (this is the same as one per cent of the loan). It can also have a higher rate of half a point.

When the mortgage rates are going up, you might consider locking the lower rate ASAP. You are making a gamble because it is hard to know how the interest rates are going to behave – there are many factors considered when determining the rates. Have a look at the interest rates from the past 60 days so you can see the fluctuation.

Mortgage Rate Lock Fees

You can save a lot on your mortgage using a rate lock, but there are costs to incur in the process. There are two main options for rate-lock fees: the rate lock fee and the extension fee.

You might be required to pay the initial fee upfront, or it can be added to your loan. If you are looking to extend the lock, the lender can charge additional fees, which are usually a percentage of the loan.

Questions You Need to Ask The Lender Before Locking

You need to talk to your lender so you can understand their rules. Your lock can be void if you lock it too soon and then choose a different type of loan. If circumstances change, a borrower can lose their lock – e.g. a change in their debt-to-income (DTI) ratio or a shift in their credit score before settlement. The underwriting process can find factors that you might not have known about or never thought were important. This makes it important to ask the lender the conditions that can void your lock.

  • Are there any circumstances that can cause the locked rate to change?
  • Is the rate lock going to remain long enough until the entire home buying process is done?

How to Make Sure You Are Prepared for a Mortgage

Before locking the rate, you need to ensure your budget is in order and you are ready financially to apply for a mortgage. This includes having the cash needed to lock the rate if needed. You should ask yourself:

  • Do I have a good enough credit score to get preapproved?
  • Have I looked at homes that are within my budget?
  • Do I know how much I can afford to spend on monthly payments?

Bottom Line

Mortgage rates change regularly, and a lock can help you avoid the uncertainty – but it comes at a fee. If the interest rates are low, it is a good idea to secure the rate so you can pay less on your loan.