Should You Lock in Your Mortgage Interest Rate?
Imagine you’re buying your dream home and are just days away from closing. Everything in the process has gone smoothly so far, and you have no reason to expect anything different as your closing date approaches.
Now, imagine your surprise when your mortgage lender provides you with the final details of your loan and you see the interest rate — and along with it, your payment — is much higher than what you were told it would be.
This scenario plays out repeatedly across the country, said National Association of Mortgage Brokers president Richard Bettencourt.
Mortgage interest rates can fluctuate from day to day, so the rate offered at loan approval can be quite different than the rate available at the time of closing. One way buyers can protect themselves from a rate increase and a surprise at the closing table is by taking advantage of a mortgage rate lock.
What is a mortgage rate lock?
A mortgage rate lock is an option homebuyers can exercise to freeze or lock in the interest rate on their loan for a specific amount of time. This protects the buyer from increases to their rate due to market fluctuations between the time the rate is offered and the closing of their loan.
Rate locks are for a certain amount of time, ranging anywhere from 15 days to as high as 120 days or more in some cases. The most common time frames are 30, 45, or 60 days.
Bettencourt, who originates loans for Massachusetts-based Mortgage Network, said most of his buyers take advantage of this loan feature. “…85 to 90 percent of my clients lock in their rate, especially in today’s environment where rates are going up,” he said.
Without locking the rate in, a buyer’s loan is subject to the going interest rate at the time the purchase is finalized, which could be higher or lower than what was initially offered.
How does a mortgage rate lock work?
Locking in your rate can be done at various points within the home buying process. Bettencourt said his clients typically lock in their rate the minute they come under contract on a particular property, but it can also be done later in the transaction.
Some buyers may choose to wait and “float” their rate with a plan to lock it in later in hopes that interest rates decrease. Most lenders will specify that a certain number of days must be allotted between locking the rate and closing.
In some cases, you may be able to lock in your rate even before selecting a home. Some lenders offer a “lock and shop” or “TBD lock” feature where your rate is locked for a specific amount of time while you look for a house, Bettencourt told LendingTree.
Once you choose to lock in your interest rate, it will remain the same regardless of what the market is doing, provided you close before the rate lock expires, make no changes to the type of loan you are getting or lose your loan eligibility.
While locking in your rate protects you from rate increases, it also means that if interest rates decrease, you will still pay the higher rate, unless your lender offers an option to take advantage of a rate drop.
The cost of locking in your rate
Fees and policies vary from lender to lender, but typically the cost of locking your rate is incorporated into the interest rate. “The longer you hold a rate, the higher the rate is going to end up being,” Bettencourt said.
Lenders also offer the ability to extend your rate lock if your loan does not close by the expected date, but you will incur an additional fee. Bettencourt said the fee for a rate lock extension is typically a percentage point of the loan amount, usually ranging anywhere from 0.125% to 0.5%, depending on the length of the extension. Some lenders may provide a one- to three-day extension at no charge as a courtesy to the buyer.
How do you do a mortgage rate lock?
Some lenders may ask you if you wish to lock your rate in, while others may not. If you are interested in locking in your mortgage interest rate, you would begin by communicating with your lender or mortgage professional.
Bettencourt typically has his clients put their request in writing. Your lender may have a different procedure. Again, because policies, fees, and procedures vary by lender, find out exactly how locking in your late works with your lender. Here are some questions to ask:
- At what point in the process can I lock in my rate?
- What is the procedure for locking in my rate?
- What is the cost associated with the rate lock?
- What are the different rate lock lengths?
- What happens if I am unable to close within the timeframe?
- What is the fee to extend the rate lock?
- What happens if rates go down?
Knowing the answers to these questions will help you make an informed decision.
When should you lock in your rate?
Whether or not to lock in your rate can be difficult to determine, but Bettencourt said there are some scenarios where it makes sense to lock in your rate as soon as possible.
- If you are in a market where rates have been consistently rising.
- If you may not qualify for your loan with a higher payment. “If you are a borrower who borderline qualifies because of your debt-to-income ratio, you run the risk of not qualifying if the rate goes up,” Bettencourt said.
- If your budget cannot handle an increase in payment. If the current payment is already close to or at your limit, don’t risk an increase.
- If you are buying a new construction home. Closing times are typically longer for new construction homes, so a rate lock can protect you from increases during that time.
- If there is potential for delays in your closing. This includes if you are buying and selling at the same time, and your purchase is contingent upon the sale of your home.
- If you are pleased with the current rate and terms. Bettencourt advised that if the existing rate and payment work, then you should not risk it changing.
Pros and cons of locking in your mortgage interest rate
Like most decisions, there are pros and cons to locking in your rate.
- It protects you from a rate increase
- It sustains your buying power
- It’s usually less expensive than a rate increase
- It’s a simple process
- A longer rate lock affects your initial interest rate
- You usually cannot take advantage of a drop in interest rates
- Extending the rate lock can be expensive
- You might feel like you wasted money if rates don’t increase
Things to consider
When considering locking in your rate, there are some things consumers should take into account.
- Your risk tolerance. Bettencourt said consumers should consider how comfortable they are with risk. “The rate increase or decrease directly affects whether your monthly payment goes up or goes down,” he said. “How risky of an individual are you?”
- The current market. While no one can predict the future of interest rates, take a look at what rates have been doing in the weeks and months before securing your mortgage.
- Expected closing date. “You need to be pragmatic and realistic about your closing time frame,” Bettencourt said. If you choose to lock in your rate and have to extend it, that can cost you thousands of dollars.
- Your eligibility. Consider carefully whether your loan qualification would be affected by an increase in your interest rate.
If you choose to lock in your rate
As you decide whether or not to lock in your mortgage interest rate, Bettencourt stressed the importance of communication before and during the process.
If your lender does not present the option to lock in your rate, simply ask. It will prevent any surprises at the closing table.