Should I Lock My Mortgage Rate Today?
JA
Summary:
When you’re buying a home, the interest rate you’re offered can make a big difference in your monthly mortgage payment. This is why locking your mortgage rate can be a smart financial decision in the long run. A rate lock is essentially an agreement between you and your lender that guarantees the interest rate for a certain amount of time. This can help you secure a better rate and avoid paying higher interest rates if rates go up.
When you lock your mortgage rate, you will not have to worry about the interest rate increasing during the time that it takes for your loan to be processed. This can offer you peace of mind during the home buying process and potentially save you a big chunk of money. However, locking your mortgage rate could also entail missing out on lower interest rates after committing to the agreement. So, here are a few things to keep in mind to ensure you’re getting the best mortgage rate possible.
Why is a rate lock important? A mortgage rate lock is important for avoiding paying a higher interest rate on your loan due to market fluctuations. For example, the cost for a $300,000 loan at a 30-year fixed rate could go up by more than $90 per month if the interest rate rises from 5% to 5.5%. This would result in more than $33,000 in interest payments. As you can see, without locking your interest rate, even the smallest percentage change could cost you a significant amount of money.
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What is a mortgage rate lock?
A mortgage rate lock is great for preventing uncertainty and preserving the interest rate in your current mortgage loan offer. But what is it, exactly, and how does it work?
A quick review of mortgage rate lock
A mortgage rate lock is essentially an agreement between you and the lender that allows you to lock in the interest rate of your mortgage for a specific amount of time. This means that your interest rate will be fixed and won’t change between the offer and closing date — assuming there are no changes to your application and your rate lock doesn’t expire before closing.
How it works
Once your initial mortgage loan application has been approved, your mortgage lender will typically offer you the option to lock your mortgage rate before submitting your application for underwriting. However, rate lock policies vary by lender. So, if your lender doesn’t initiate a conversation about rate lock, make sure to ask.
After you secure a mortgage rate lock, your lender or broker will guarantee the interest rate for a specific period of time — usually from 30 to 60 days. This protects you from market fluctuations and rising interest rates, which could increase your monthly payment and make it more difficult to afford your home.
Handy tip: Our article on how to calculate your monthly mortgage payment can help you understand all the factors that influence your monthly mortgage payment. With this knowledge, you’ll be able to work through the numbers to get a better idea of how much you can save by securing a lower interest rate. You’ll want to do this with the help of an online mortgage calculator, such as the simple payment calculator provided by a lender with positive SuperMoney reviews.
How much can a higher interest cost you in mortgage payments?
Failing to secure a good rate will affect your monthly payments and the total cost of the mortgage. The table below illustrates the effect of interest changes on a $300K mortgage with a 30-year fixed-rate term.
| Interest Rate | Monthly Payment | Total Amount |
|---|---|---|
| 2.00% | $1,109.00 | $399,240.00 |
| 3.00% | $1,263.00 | $454,680.00 |
| 4.00% | $1,432.00 | $515,520.00 |
| 5.00% | $1,610.00 | $579,600.00 |
| 6.00% | $1,799.00 | $647,640.00 |
| 7.00% | $1,996.00 | $718,560.00 |
Having to settle for a mortgage with a 6% interest rate instead of a 5% rate because you failed to lock it before a Fed fate hike, could could cost you nearly $190 a month (more than $68K over the life of the mortgage).
When should I lock in my mortgage rate?
The decision of when to lock in your mortgage rate is an important one. Locking in your rates at the wrong time can cost you thousands of dollars in mortgage payments in the long run. To help you make the most informed decision, here are some pros and cons you should consider before committing to a rate lock.
Pros and cons of locking rates immediately
Buying a home or refinancing?
It’s worth mentioning that the best time to lock in a mortgage rate could look different depending on whether you’re buying a house or refinancing. If you’re a homebuyer, you might want to lock a mortgage rate once you’ve found a property you want to purchase and are approved for a mortgage loan. On the other hand, if you’re refinancing, it’s probably a good idea to lock in a rate once you’ve found an attractive loan with the best terms, rates, and conditions.
How long a rate lock period lasts
How long a mortgage rate lock lasts will usually depend on the lender, but it can be anywhere from 30 to 60 days — sometimes shorter and sometimes longer.
According to ICE Mortgage Technology, a data provider in the mortgage industry, the average mortgage closing time ranged from 40 to 58 days in 2020. So make sure to take into consideration how long you think it will take you to close when you lock your rate. If you’re not sure, ask your lender to provide a reliable timeline estimation.
Should you use a mortgage rate “float down”?
The float-down option allows you to lock in your mortgage interest rate, but also gives you the ability to take advantage of lower interest rates if they become available before your loan closes. This can be a great way to ensure that you get the lowest possible interest rate on your mortgage. However, it’s important to note that there may be a fee associated with using the float-down option.
Also, lenders usually won’t let you change to a lower rate unless rates fall by a certain amount. Let’s say that amount is 0.5% and you’re offered a loan with an interest rate of 4.75%. For you to take advantage of the float-down option, the current interest rates would need to fall below 4.25%. If you don’t think the rates are likely to drop this low during your lock period, you might want to reconsider paying extra for this option.
Remember this: If you use a mortgage rate float down, make sure you keep up with mortgage rates. Your lender most likely won’t let you know when to exercise your float-down option. Make sure to call and inform your lender when you want to make a request to opt into a lower rate.
How much a rate lock costs
Mortgage rate lock cost varies depending on the lender. Generally, though, the fee can be anywhere from 0.25% to 0.5% of the total loan amount. So, if you’re borrowing $200,000, the cost of the rate lock could be from $500 to $1000.
Some lenders might not charge a separate fee for a rate lock, but this usually means that the cost for a rate lock is already included in the rate that you’re offered. So be sure to ask about the cost and terms of the mortgage rate lock when you’re shopping for a loan.
FAQ
Can I walk away from a rate lock?
Yes, you can walk away from a rate lock and cancel the agreement. However, this will most likely come with consequences. Depending on the lender’s policy, backing out of a rate lock usually means that you’ll be giving up the mortgage application you’ve put your time and money into. Canceling the agreement could also mean forfeiting your earnest money and application fees — which can add up to hundreds or even thousands of dollars depending on your loan amount.
Should you lock or float your mortgage rate today?
If you’re a first-time homebuyer, you might be wondering if you should lock in your mortgage rate today or wait and see what happens.
Lock your rate for maximum security
Locking in your mortgage rate will provide you with some security. Knowing that your interest rate will not go up for the duration of your lock can eliminate a lot of anxiety. But locking in a mortgage rate can also mean that you miss out on any decreases in rates that may occur while your lock is in place.
Float your rate to take advantage of falling rates
Floating your mortgage rate, on the other hand, means that you will not lock in your interest rate, but will instead agree to pay the current market rate at the time of your mortgage closing. If rates go down while you are floating, you will benefit from the decrease. If rates go up, however, you could end up paying more for your mortgage than if you had locked in your rate. Floating a rate can be a good idea if you believe strongly that rates will fall by closing. But predicting the future is always risky — even the most experienced financial experts have trouble making consistently accurate predictions.
The choice is yours
In the end, it is up to you to decide what is best for your situation. Make sure to talk to your mortgage lender about the pros and cons of locking in your mortgage rate today, and weigh the risks and rewards for yourself.
How long before closing can you lock in a mortgage rate?
You can lock in your mortgage rate the moment you select a loan or five days before closing. Locking in early can help you better budget for your monthly mortgage payment and know what to expect. And, as long as you close before the rate lock period expires, you won’t have to pay a fee for requesting an extension.
What happens if I lock my interest rate and rates go down?
If you lock in a mortgage rate and interest rates subsequently fall, this usually means you’re bound to the rate your lender locked for you. But there are ways you may still be able to get the lower rate. This generally involves paying a fee, so it’s important to weigh the cost against the potential savings.
- Ask your lender about a ’float down’ option: A mortgage float-down option lets you take advantage of a drop in market interest rates while retaining a locked rate’s security against rising rates.
- Cancel the agreement and switch lenders: Backing out of the locked rate agreement and canceling the loan application process is another way to avoid being stuck with a high interest rate. Be mindful that this option can come with penalties, cancellation fees, and extra paperwork.
Key takeaways
- “Mortgage rate lock” is a financial term that refers to the process of locking in your interest rate for a home loan.
- When you lock your rate, it’ll be guaranteed by the lender for a specified period of time. The time frame is usually from 30 to 60 days.
- If you fail to close on a home loan by the end of the lock period, you’ll have to pay an extra fee to request an extension.
- Generally, the rate lock fee can be anywhere from 0.25% to 0.5% of the total loan amount.
- If you lock your mortgage rate and the market rates fall right after, you can exercise your float-down option if you have one. Or, you can choose to back out of the agreement and apply for another loan with a new lender. Both options will incur additional costs.
Compare multiple lenders before locking your mortgage rate
Will interest rates go up or down in the weeks leading up to the closing date of your loan? No matter how many factors you take into account, your predictions will never be 100% certain. Because of the unpredictability and fluctuation of interest rates, the best thing you can do is to apply to multiple home loan lenders and see which one preapproves you for the best deal. Once you find a rate that is an ideal fit for your budget and have thought about your decision carefully, lock in the rate as soon as you can.
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