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How can you lock in a mortgage rate and when does it make sense to do?
If rates are likely to go up between when you apply and when you close, you may want to consider a lock
With mortgage rates high and seemingly only getting higher, it makes sense for potential buyers to wonder whether they can lock things in before they get worse. While a 7% interest rate might not be great, it’s still better than a rate of 7.4%.
The good news: “Locks are a common feature of mortgages” to “protect a borrower’s rate during the home-buying process,” said The Wall Street Journal. However, they can “vary in their fees, their conditions and the amount of time they cover.” Here’s what to know.
How can you lock in a mortgage rate?
A rate lock is essentially an “offer by a lender to guarantee the interest rate of your loan for a specified period of time,” said NerdWallet. For the duration of that period, the interest rate your lender had quoted you will not change — even if mortgage rates overall go up.
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A rate lock will often last from the initial approval of your mortgage application through closing, though the exact timeline will depend on the specifics of the contract. “Typically, you can lock your rate for at least 30 days and in some cases up to 120 days or longer, depending on the lender and loan type,” said Bankrate.
Are there any downsides to rate locks?
One thing to look out for with a rate lock is whether a lender charges a fee for it. “Many lenders offer rate locks for free,” while others do not, and “some only charge when you extend the initial mortgage rate lock period,” said Bankrate.
Fees generally range from “0.5% to 1% of the total loan amount,” said Experian. And even if a rate lock is ostensibly free, the “cost is frequently baked into the loan pricing via a slightly higher interest rate or reduced lender credits,” said the Journal.
Another thing to be aware of is that while locking in your rate can offer peace of mind when mortgage rates are unpredictable or rising, a rate lock can also leave you stuck with a higher rate should rates fall. To cover this scenario, lenders may offer what is known as a float down option, which lets you drop your rate, though often for a fee.
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When should you consider a rate lock?
A rate lock can make a lot of sense if there is a good chance rates could go up between when you apply and when you close. Even a slightly higher rate can have a big impact on both monthly payments and the total amount of interest you pay over the life of a loan.
“Consider a $400,000 home financed for 30 years at 7%, with a 20% down payment,” said NerdWallet. “Just a quarter point (0.25%) rise in interest rates will kick your principal-and-interest payments up $54 a month — from $2,129 to $2,183. Over just five years that additional amount will total $3,240.”
In order to reap the potential savings of a rate lock, you have to make sure the rate you’re quoted in the first place is a competitive one — and that it will last as long as you need it to. Before committing, make sure to shop around for a mortgage and consider the overall timeline of your home search.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.
