many keys pointing to a lock to introduce when to lock your mortgage rate

Mortgage Rate Locks: How and When To Lock In Your Rate

TLDR

What You Need To Know

  • Mortgage rates can change while you’re applying for a mortgage loan. By locking a mortgage rate early on, you protect yourself from sudden rate increases
  • Mortgage rates are affected by changes in the federal funds rate, market fluctuations the state of the economy, inflation and mortgage demand
  • Shorter lock periods usually mean a lower interest rate because there’s less chance for market fluctuations, but you risk having your rate lock run out before you close

Contents

Mortgage rates are often very volatile, and changes in mortgage rates can have a major effect on the home buying process. For example, it would be a major bummer if interest rates set by the Federal Reserve shot up during closing, making payments for your dream home suddenly less affordable.

Luckily, you can lock in a low interest rate with your mortgage lender to prevent any sudden changes from impacting your home purchase. By locking a mortgage rate early on, you won’t have to worry if anything changes in the market while you’re closing on a home. Let’s take a look at how mortgages work and how you can lock in the lowest mortgage rates available.

What Is a Mortgage Rate Lock? 

A mortgage rate lock is a promise from a lender that, no matter what happens over the next few weeks, between the offer and closing, you’ll be able to secure a mortgage with a specific rate. 

These locks are available to home buyers, as well as people who are refinancing an existing mortgage. Though some lenders may charge a small fee, a mortgage rate lock can help give you peace of mind. 

How Long Can You Lock in a Mortgage Rate?

Mortgage lock periods depend on the lender, your location and your loan type, but they usually are  set for 30, 45, 60  or 90 days.

Shorter lock periods usually mean a lower interest rate because there’s less chance for market fluctuations. But they can also expire and leave you at the mercy of the current market rate – unless your lender agrees to grant an extension. If your lender does grant an extension, you may need to pay an additional fee.

When should you lock in your mortgage rate?

Ideally, you’ll want to lock in your rate when it’s as low as possible. However, you’ll also want to avoid locking in the rate too early. Otherwise, if the application process lasts longer than your rate lock period, you risk having your rate lock end before you’re ready to close. That means you may be subject to a sudden change in interest rates just as you’re getting close to the finish line.

What if I Lock in a Rate and It Goes Down?

Your locked-in mortgage rate is a non-binding commitment. This means that while you have the option to lock in the rate, you don’t always have to accept it. If rates drop during your rate lock period, you may be able get a lower rate using these two methods.

Float-down option

You can ask for a “float-down” option, which gives you a one-time chance to snag a lower interest rate during your lock period but still protects you from increases. A lender may also include a cap, which permits the rate to increase – but only to a predetermined limit.

Rewrite rate lock 

Even without a float-down option, you can ask your lender to rewrite the rate lock at an additional cost if the rate drops enough where it makes sense to do so. That way, you don’t have to miss out if you see an uber low rate.

What Affects Mortgage Rates: Why Rates Change

There are many external events that cause mortgage rates to change, including:. 

  • The federal funds rate: Set by the Federal Reserve, this is the cost for lenders to borrow money. When they pay more, you pay more. The federal reserve may lower this rate to help boost the economy during a recession or raise it to fight inflation.
  • Mortgage demand: When the housing market is hot, lenders may raise rates to take advantage of the demand. If demand is low or competition among lenders intensifies, lenders may lower rates to stay competitive.

Paying attention to announcements from the Federal Reserve and other relevant news sources can help make the mortgage market easier to navigate.

The rates you’re being offered can be affected by changes in your personal finances, as well.

  • Credit score: Your credit score tells lenders whether they can count on you to make payments on time.
  • Down payment: The bigger your down payment, the lower your interest rate.
  • Loan term: While your monthly payments will be higher, a 15-year mortgage will have a lower interest rate than a 30-year mortgage.
  • Interest rate type: Adjustable rates follow the market, while fixed rates stay the same.
  • Loan type: U.S. Department of Veterans Affairs (VA) loans and Federal Housing Administration (FHA) loans have a lower risk to lenders, which lowers the rate.
  • Mortgage points: Mortgage points are like a down payment on the interest that goes directly to the lender and lowers your rate.

Should I Lock My Mortgage Rate?

Locking your mortgage rate is like getting mortgage interest rate insurance. Like all insurance, you spend money to protect yourself against something you hope doesn’t happen. Whether a rate is worth it will depend on the cost of a mortgage rate lock, as well as how likely interest rates will change.

If the rate doesn’t increase, you’ve just paid for peace of mind. But sometimes, peace of mind is what you need. Without having to worry about a sudden rate increase, you can focus on other aspects of your home purchase.

Lock In, Save Money

Mortgage rate locks are the smart way to go when it comes to home buying or refinancing. Home buyers can save thousands during the life of their loans by locking in a great rate.

ICYMI

In Case You Missed It

  1. If your lender doesn’t offer a mortgage lock, ask for one

  2. A float-down option lets you change to a lower rate but protects against increases

  3. Make sure your lock period is long enough to allow for processing delays

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