There’s a reason that so much of the advice given to home buyers focuses on securing the best interest rate possible. After all, even a small difference in your mortgage rate can make a sizeable difference in the total cost of your home loan over its lengthy lifespan. However, markets are fickle things, and interest rates can change quickly. If you want to hold onto the interest rate that you’re offered, then you’ll need to understand how to lock in a mortgage rate.
How to Lock in a Mortgage Rate
As the Consumer Financial Protection Bureau explains, interest rates don’t sit still. They change on a daily, if not hourly, basis. If you don’t want to live with the uncertainty of a continually shifting interest rate, you can have your lender lock in your mortgage rate. A rate lock is an agreement with your lender to keep your interest rate the same for a set period of time. It’s generally 30, 45, or 60 days.
Understanding a Rate Lock
To understand why homebuyers opt for rate locks, NerdWallet suggests that you consider these scenarios:
- Interest rates remain steady. If your interest rate doesn’t budge between when you locked it and closing, then locking the rate may feel unnecessary. However, it may provide peace of mind. With so many other things to worry about during the closing process, that’s valuable.
- Interest rates rise. When interest rates climb, it’s easy to see the value of a rate lock because it keeps your loan’s interest rate low.
- Interest rates fall. This can be a frustrating situation because the lock will still hold your rate in place, keeping it higher than the current rate. However, some rate locks come with a float-down option that allows you to drop your rate if rates do fall. It can usually only be triggered once, but float-down rules vary widely, so be sure to ask about the feature.
The Process for Locking in a Mortgage Rate
Deciding when to lock your mortgage rate can be tricky. But as Credible explains, the actual process of how to lock in a mortgage rate is a piece of cake:
- Ask about time frames. Check with your lender regarding their rate lock policies, including when you can first lock in a mortgage rate, what intervals are available, and how they handle extensions. Ideally, your mortgage rate lock should run past your planned closing date.
- Ask about a float-down option. Ask whether the lender offers a float-down option. If so, how does it work?
- Ask about costs. What fees are associated with the mortgage rate lock? What about the float-down option or any rate lock extension? Are any fees refundable?
- Watch mortgage rates. Keep an eye on mortgage rates. If rates seem to be rising, you may want to think about locking. If rates seem to be trending down, you may want to wait.
- Decide. While a real estate agent or loan officer can offer advice, the final say is yours.
- Ask for your rate lock. If you decide to lock in a rate, contact your lender to request a rate lock for a specific interval.
- Check the new loan estimate. Your lender should provide you with a new loan estimate that says the interest rate won’t increase unless the rate lock expires.
The Pros and Cons of Rate Locks
As Forbes indicates, mortgage rate locks have some definite perks. After all, with a rate lock, if you like your interest rate, you can keep it as long as your rate lock doesn’t expire. Plus, you won’t have to worry about changes to your monthly payment or scrambling to pull things together at closing because your interest rate is set. However, mortgage rate locks also have a dark side. You could end up missing out on a lower rate if you proceed with the loan. Or, if your rate lock expires, you could have to pay hundreds of dollars more or forgo the benefit altogether.