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If you’re considering applying for a mortgage, there are several factors you’ll need to keep in mind. In addition to your mortgage term, closing costs, and other variables, you’ll also need to be mindful of your prospective mortgage rate.
Naturally, this leads future homeowners to ask a lot of questions, such as: When I applied for a mortgage, did I get a great deal? Am I overpaying for the mortgage I’m considering?
However, answering these questions isn’t always easy. Securing a mortgage rate is usually a step in the right direction, but you still might be wondering if and when you should lock in your mortgage rate.
As you might expect, the typical answer is: it depends. With that in mind, let’s explore when locking in your mortgage rate makes sense for you.
What Is a Mortgage Rate Lock, and How Does It Work?
A mortgage rate lock – keeps your interest rate from rising from the time you lock in your rate to the time you close on the loan. In other words, if you secure a mortgage rate lock, and your loan closes during the rate lock period, you can be confident you’ll be able to pay a predictable future monthly payment (all terms considered).
The obvious benefit of a mortgage rate lock is that it’ll be easier to predict what your future mortgage payments will be. However, there are still many other factors you’ll want to consider.
Fees for locking in a mortgage
The fee, if any, you’ll need to pay to “lock in” a specific mortgage rate will usually depend on the lender you’re borrowing from. Most lenders don’t charge an initial rate lock fee, but if there is one it can be a flat fee or a percentage of the mortgage amount, usually between 0.25% to 0.5%. For a $300,000 home, that would be $750 – $1,500.
How To Tell if It’s a Good Time To Lock In Your Mortgage Rate
Again, there are a lot of things you’ll need to think about before deciding whether or not to lock in your current interest rate. And – for better or for worse – the variable that affects mortgage interest rates the most is the rate presented by the Federal Reserve.
The Federal Reserve, also known as “The Fed,” is the central banking institution that dictates the general cost of borrowing in the United States.
This “cost of borrowing” applies to essentially every asset class, including real estate. The Federal Reserve meets roughly once per month to discuss the economy. When the Fed decides to increase interest rates, the general cost of borrowing will increase. When the Fed drops interest rates, buying a home becomes more affordable.
As a result, whether you should lock in your interest rate depends on where the Fed is moving. If you’re interested in securing a mortgage, be sure to pay close attention to what the Fed is up to.
To start, many people – regardless of what the Fed is doing – like to secure permanent rates because they’re predictable. If you lock in a rate right now, you’ll always know what you have to pay.
If you don’t lock in an interest rate, you will be subject to changes in the economy. That means interest rates could rise from when you’re preapproved to when you actually close on the loan. That could translate into higher monthly payments. Locking in your rate means you don’t have to worry about that.
The most obvious reason to avoid locking in your rate is that interest rates drop right after you lock a rate in. However, some lenders may allow you to qualify for a lower rate after you are locked-in. Make sure to ask this when you are deciding on a mortgage rate and loan.
Having a low interest rate can be great, but there’s no guarantee it’ll last forever. If you’re interested in buying a home, be sure to move quickly. Extending a rate lock past the initial lock period could cost you extra money you didn’t plan on spending.
What if Interest Rates Drop After I Lock In My Mortgage Rate?
If interest rates drop right after you secure a mortgage rate lock, that doesn’t mean you’re out of luck. But if you want to secure the lowest rate possible, you’ll need to pay close attention to current market rates, causes of change, and when rate changes are likely to occur.
Lock In a Cheaper Mortgage
Overall, anyone who’s interested in securing a mortgage – and believes rates are likely to rise – should consider locking in a low interest rate as soon as they can. This could be the best way to minimize your future mortgage payments.
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The Short Version
- If you secure a mortgage rate lock, you can be confident you’ll be able to pay a predictable future monthly payment
- When the Fed decides to increase interest rates, the general cost of borrowing will increase
- If interest rates drop right after you secure a mortgage rate lock, that doesn’t mean you’re out of luck