When to Lock In Your Mortgage Rate
When buying a house and going through the home loan origination process, buyers can opt to lock in an interest rate before the loan closes. As the buyer, this can help protect you from fluctuating interest rates, which may cause your overall mortgage cost and payment amount to increase.
However, doing so does come with a cost, so you’ll want to make sure it makes sense for your situation. If you lock in a rate at the wrong time and interest rates drop, you may end up overpaying over the life of your loan. It’s important to know when to obtain a mortgage rate lock and when to skip it to save the most money possible on your home purchase.
When to lock in a mortgage rate
A homebuyer should lock in a mortgage rate if rates are expected to increase in the near future. It can also be a smart move if you want to cement your loan cost and payment amount for peace of mind.
If you decide to lock in a mortgage rate, the best time to do so is usually right after you’ve signed a purchase agreement for a home, although in some cases it will be after the appraisal. Mortgage rate locks last for an average of 30 to 60 days, which is usually about how long it takes to close on a house. If you secure a rate as soon as your offer is accepted, the timing of your lock and the closing date should line up nicely.
“Locking in your rate at least four weeks prior to the closing date (standard lock period is 30 days) allows ample time for most buyers to obtain homeowners and title insurance, complete the appraisal process and submit any additional documentation required by their lender,” Nora Apsel, COO and Cofounder of Morty, said. “Locking more than 30 days prior to close increases the time buffer but generally results in slightly higher closing costs because the lender has a greater risk to hedge.”
Longer lock periods may make sense if rates are trending upward and you expect your closing process to be longer than usual. You may want to lock in your rate early on if you have complicated employment or financial situation, for example.
You should also consider the type of loan you are getting when determining when to opt for a mortgage lock.
“If the buyer is getting a VA loan or an FHA loan, we advise our clients not to lock in the rate until after the appraisal has come back,” said Benie Khan, CEO, and Operations Manager for FedHome Loan Centers, “This is because the appraisal can come back with repairs needed, which can result in the closing date being extended.”
As a general rule, mortgage locks should be initiated 30 days before closing, after the purchase agreement or appraisal is completed (depending on the loan type) and when interest rates are expected to increase or buyers want the security of knowing what their rate will be.
Is now a good time to lock in a mortgage rate?
“Once a borrower is under contract to buy a home and a closing date has been set, there should be a really good conversation between the borrower and the loan officer about the current economic market and what the trends are,” Patrick Holland, Vice President of Embrace Home Loans, said. “Borrowers shouldn’t leave themselves exposed to risk or volatility, though. If a borrower is happy with their current rate and payment, and if the closing date is imminent, I always advise to lock the rate because they are basically locking in that protection.”
As far as the signs to look for, Holland said there is no foolproof plan, but some market indicators can provide hints such as when the stock market climbs, interest rates typically climb. Further, he follows the 2-, 5- and 10-year treasury indexes, which typically rise and fall with interest rates.
Reasons to lock in a mortgage rate
One of the biggest reasons you should lock in a mortgage rate is for peace of mind. Interest rates are unpredictable and can rise at any time. Some buyers are willing to take a gamble and hold out for better interest rates but if you’re a more risk-averse buyer on a tight budget, the certainty can ensure your purchase goes smoothly.
“You never want to risk your ability to get to the closing table,” Holland said. “If there is a closing date set and the loan approval is based on a certain rate and it’s very tight, it’s better to lock in your rate to make sure you’re going full speed ahead because the sale contract is a legally binding agreement.”
If you’re really worried about missing out on falling interest rates, you can also consider adding a float down option to your mortgage rate lock. It allows you to renegotiate your interest rate one time. If you see a better deal, snag it. You’ll usually have to pay an extra fee to add a float down option, but it could be worth it for the peace of mind and potential savings.
How to know when the timing isn’t right
There are a few situations when locking in a mortgage is a bad idea. For one, you should not try to lock in a mortgage rate early on in the homebuying process. If the offer on the home you want to buy hasn’t been approved yet, it’s usually too soon to lock the rate and it will likely expire before you close.
Any changes in your circumstances can also cause you to lose out on your rate lock. For example, if your income or credit score fluctuates drastically or you decide to go with a different type of loan, the agreement may become void. Before you lock in a rate, make sure you’re in a stable financial position and know which type of loan you want.
You should also consult with an experienced mortgage expert before you commit to anything.
“It’s a good idea to lock the interest rate only if you have strong evidence to believe that interest rates will remain the same or increase. If experts expect the interest rate to go down, then you should most probably not lock the mortgage rate, as you will end up paying more than if you don’t lock it,” Daniela Andreevska, Marketing Director at Mashvisor, said.
The bottom line
A mortgage rate lock is a good idea for many buyers. It can protect you from rising interest rates that will increase the cost of your mortgage and locking in your rate can give you peace of mind. There are so many things to worry about during the home buying process and a rate lock can alleviate at least one concern. If you prioritize predictability in the transaction, a rate lock is the way to go. It may also be attractive, even to the risk-takers, if interest rates are expected to increase before you close. To make the best decision for your situation, it’s best to educate yourself and consult a mortgage advisor you can trust about the current mortgage rate trends.