Mortgage rates are constantly fluctuating. Even during the home buying process mortgage rates can change in or out of your favor. That’s why it’s important to know how and when to lock in your mortgage rate.
Rates often fluctuate enough to save you hundreds to thousands of dollars over the life of your mortgage, and vice versa.
The largest benefit of locking in your mortgage rate is it fixes your home loan’s interest rate, preventing it from increasing before closing.
What is a Mortgage Rate Lock?
A mortgage rate lock is when you agree to the interest rate that you’ll pay on your mortgage. This is a service most lenders offer to help borrowers lock in a rate that works for them while the home loan is being finalized.
There are several factors that affect rates, like the Federal Reserve, inflation and the state of the economy. However, once locked in, your rate is secured and will not increase due to these factors.
When Should You Lock in a Mortgage Rate?
You have the flexibility to lock in a mortgage rate from the time you find a mortgage to five days before closing. Locking in early will help you accurately calculate monthly payments to give you a better idea of which homes are within your budget. Obviously, it’s best to lock in rates when they’re at their lowest, but that’s often an impossible prediction.
Experts suggest you lock in a mortgage rate between the time you get a pre-approval and the time you submit your mortgage application. Most lenders will offer a rate lock after the initial loan application. If the lender does not offer a rate lock, you can always ask for one.
To determine whether you’re getting a good rate, look at the national average for mortgage interest rates and understand how strong your buying power is. If you have a great credit score and a low debt-to-income ratio, then your rate should be decent.
To get a better idea of when your lender will offer you a mortgage rate lock, here are a few rate lock questions to ask your lender.
What Happens If You Don’t Lock in Your Rate and it Changes?
A mortgage rate lock period is between 30 and 90 days. If you lock in your rates, then you’re promised that rate regardless of an increase. However, if the rates drop within this period, you can talk to your lender about a float-down option. A float-down option allows you to lock in your mortgage rate at the lowest cost during the duration of your application.
If you don’t lock in your rate, you risk having a higher mortgage payment and down payment when you’re ready to purchase. An interest rate increase of just 0.25% can affect your payments by thousands of dollars.
Although there is a standard rate lock period of 30 to 90 days, you can ask for extended rate lock features. Here are a few scenarios where an extended rate lock recommended.
How to Lock in Your Mortgage Rate?
While it’s nearly impossible to determine when to lock in your mortgage rate, the actual process is uncomplicated.
Talk to your lender about the best time to lock in the mortgage rate and whether you should use the float-down option.
Determine the charges and fees associated with locking in your rate. Also know that fees are refundable if you cancel the application.
Keep the lock timeline in mind. One you sign the purchasing agreement; you’ll have a closing date set. Your mortgage rate lock should go beyond that close date.
Check mortgage rates. Watch the national average for mortgage rates and determine when it’s best for you to lock in your rate.
Make the move. Once you’re armed with information and ready to make the move, contact your lender and ask for a rate lock.
Review the paperwork. Once you have a locked in rate, the loan estimate will state what the interest rate is until the expiration date.
Get Help Locking in Your Mortgage Rate
Each homebuyer has a unique situation that either allows or prevents them from locking in the best mortgage rate. Remember, a mortgage rate lock isn’t about obtaining the best deal, it’s about protecting the homebuyer.
Some buyers want to lock in early, others prefer to wait until the fluctuation works in their favor. The benefits outweigh the risks, but it’s the buyer’s obligation to know their budget.
If you’re comfortable with the current interest rate, and the monthly payment fits into your budget, consider locking the rate in and making the move to homeownership. If you aren’t sure whether it’s the best rate you are going to get, consult with an experienced lender.
Contact us today to find out if you should lock in your mortgage rate or wait it out for a better option.