As mortgage rates have been steadily rising in 2018 into the 5% range from less than 4% a year ago for a 30-year fixed rate mortgage, more home buyers are asking when if and when they should lock their rate in this market.
If you are worried that rates will rise before you close, a mortgage rate lock could be your solution. But a mortgage rate lock has advantages and disadvantages that we detail below.
Mortgage Rate Lock Overview
A rate lock freezes the interest rate on your proposed mortgage for a fixed time. The lender will guarantee that the rate that it offered on your application will be available to you for a certain time. During the rate lock period, you do not need to worry if rates go up between the time you submit the offer and when you close on the house.
Most mortgage rate locks last from 30 to 60 days. But some can last up to 120 days. Some lenders can offer you a free rate lock for a certain time. But after that period expires, you may have to pay a fee for an extended lock.
When You Should Lock Your Rate
A mortgage loan borrower cannot lock the rate until the loan has the initial approval. But many borrowers wait to lock their rate until they find a home to buy.
Borrowers often wait because they do not know how long it will take to find a house and get an offer accepted. They worry if they lock too early that they miss the chance for a lower rate before the purchase is finalized.
Or, they may get stuck paying more to extend the lock when it expires.
A longer rate lock will cost you more money. For instance, if you choose a 30-day rate lock on a loan, you could pay a 4.875% rate and no points. But an 60 day lock could cost you a point, which is equal to 1% of the loan amount.
But as mortgage rates have been rising in 2018, you may consider locking into a rate sooner than later. Even a rate hike of .25% can cost you thousands of dollars in additional interest.
Many mortgage experts say that in the current rate environment, it makes sense to lock your rate sooner.
They advise for many people to lock when they have a contract on a property after the contract has been reviewed.
This advice is generally true for rising interest rate markets such as we are in this year. But if it appears that mortgage rates seem to be in the decline, you may decide to let the rate ride. There is a risk that it could rise though, so if you are worried about it, go ahead and lock it.
Your mortgage lender or broker is usually a great resource for helping you to decide whether to lock your rate or not.
What to Ask Lender
Before you lock your rate, you should have a clear explanation of the rate lock rules of your lender. Find out if the locked rate can change in any circumstances, such as if rates drop, or if you switch from a conventional to an FHA mortgage. Also, ensure that your rate lock period is long enough to cover the entire home purchase process. For instance, if you think your closing will take longer than 30 days, you should talk to your lender about locking a rate for such a period without having to pay for it.
Be Financially Prepared
Before you lock your mortgage rate, make sure you are financially ready to apply for a loan. Check if your credit score is good enough to qualify for the loan you want. Also, know how much you want to spend on your mortgage payments each month. If you lock your rate too early and end up with another loan, your rate lock could be voided and cost you a lot in extra interest payments.
Generally, you should lock your rate 30 days before you expect to close on the loan. But if rates appear to be in a downward cycle, you should talk to your lender about letting the rate float.