When to Lock in a Mortgage Rate

When preparing to get a mortgage you may choose to lock in your interest rate. This involves signing a formal agreement with your lender that guarantees the rate they will use for your mortgage. Once locked, you’ll be able to obtain your mortgage at the agreed-upon rate even if market interest rates change before your loan closing date. Usually it’s contingent on closing the deal within a certain period of time.

Locking your rate can be a good choice, but you have to make the tricky decision of when to lock the rate. A rate lock typically lasts 30 days, but some agreements are for 45 days, 60 days or longer. Longer rate locks usually come with slightly higher interest rates or an upfront cost. Most borrowers wait until they have signed a purchase contract to lock in their rate.

Let’s look at the advantages and disadvantages of locking your rate:

Advantages of Locking Your Rate

• Protect yourself from unexpected interest rate increases and changes in your mortgage payment.
• Maintain your loan approval for the amount you want to borrow. If you have a high debt to income ratio with your projected payment amount, you may have trouble with underwriting if rates and your monthly payment increase.
• Eliminate stress. Once you lock you can stop watching and trying to analyze interest rates.

Disadvantages of Locking Your Rate

• Lenders typically charge for a rate lock, either in up-front costs or by offering a rate that is slightly higher than the market interest rates. The longer you want to lock your rate, the more it will cost.
• Rates may decrease before you close on your loan. Then you’ll be stuck with the higher rate you locked in.
• If you run into delays, your rate lock period may expire before you close on your home. If you can’t close your loan or extend your rate lock, you will be stuck with the new market interest rates.
• Paying for a longer rate lock period can be more expensive than waiting to lock in your rate, even if the rate you get is slightly higher than what you could have gotten before.

So When Should I Lock my Rate?

Consider how much financial risk you are willing to take on. As soon as you lock your rate, you eliminate most of your financial risk and transfer it to the lender. The lender will honor the rate lock even if market rates increase. If you’re financially tight and couldn’t pay your mortgage if the interest rate increases, it may be a good idea to lock your rate early.

Pay attention to market dynamics. If interest rates have been very stable it may not be as important to lock your rate early. If rates are decreasing and are likely to continue decreasing, you may want to wait to lock the rate. On the other hand, if rates are rising it may be worth it to pay extra for a long rate lock period now.

Ready to Buy a Home?

If you’re interested in buying a new home, make sure to reach out to one of our home loan specialists. Our specialists know the mortgage industry inside and out and are happy to speak with you about your options and needs. A conversation won’t lock you into anything. It can only help you! Give us a call today at 800.852.5316.

Read more articles like this on HZCU’s Financial Knowledge Hub.