A mortgage rate lock allows you to keep your interest rate unchanged for a set period of time, usually between the time your offer to purchase is accepted and the time you close on your new home. Locking in your rate can help you better plan for future mortgage costs, as rates can fluctuate — for better or worse — throughout the closing process.
Mortgage rate trends are hard to predict, and no speculator can tell you exactly which direction rates are heading over the next week or month. A rate lock can mitigate the risk of rates rising unexpectedly, but it can also leave you stuck with a higher rate if market conditions change. By asking the right questions, you can decide if or when a rate lock is the right move.
Should you lock in a mortgage rate now?
In today’s pricing environment, you may be wondering whether to lock or float your rate. Locking in a mortgage rate protects you from rate hikes that lead to higher monthly payments and long-term costs, especially during volatile times. During the first half of 2022, average mortgage rates for a 30-year fixed loan rose from around 3% at the start of the year to more than 5% in recent months.
At the same time, a rate lock can prevent you from getting a lower interest rate if rates drop while you close out your loan, although rates are unlikely to drop significantly anytime soon. The Mortgage Bankers Association expects 30-year fixed rates to remain above 5% for most of the rest of the year.
Even if you’re shopping for a home and you’re happy with current mortgage rates, you still might not be able to lock in a rate. Lenders typically require you to sign a purchase agreement with the seller in order to lock in your mortgage rate, says Sean Grzebin, consumer origination manager at Chase Home Lending.
“If you find a home you like and are comfortable with paying for the home based on today’s rates, we suggest locking in that rate so you have certainty of what to expect. look like your payments on your home loan,” says Grzebin.
Here are a few things you should discuss with your lender to determine if you should lock in a rate today.
Is the mortgage rate lock free?
Some mortgage lenders offer short-term rate locks at no cost, which means you can avoid paying for a rate lock as long as you close during that time. But they might not technically be free, because an initial rate lock-in period is usually built into your interest rate and loan fees. Locking your rate for a longer period – or extending your current rate lock period – usually has a cost. The fee for an extended rate lock is a fixed percentage of the total loan amount, for example 0.25%.
How long does a rate lock last?
Rate lock periods typically last between 15 and 60 days, with longer term rate locks being more expensive. Some mortgage lenders may offer a rate lock extension, but you’ll likely have to pay an additional fee to lock in your rate for a longer period. Some lenders may also extend your rate lock for an additional day or two free of charge around your closing date.
What happens if your rate lock expires before closing?
If your closing is delayed beyond your rate lock period, you may need to request a rate lock extension or your rate will be reset to the current rate. About a fifth of closures are experiencing delays, according to the National Association of Realtors. Depending on why your closing is delayed, the lender may waive the extension fee.
What happens if you don’t lock a rate?
Your lender may give you the option of bypassing a rate lock or “floating” your rate. If mortgage interest rates have been trending lower over the past few weeks and you expect them to drop further, you may decide to wait and lock in your rate later. But since no lender or borrower can accurately predict mortgage rate trends, you may end up with a higher rate.
Is there a floating rate option?
Some, but not all, mortgage lenders offer a floating provision, allowing you to take advantage of lower rates if they drop during the rate lock-in period. Lenders charge a fee for this service, and there is no guarantee that rates will improve over time. Floating options can only take effect if rates drop significantly during your rate lock period, depending on the lender.
Advantages and disadvantages of locking in your mortgage rate
- Reduced risk. The main benefit of locking in a mortgage rate is that you are protected against interest rate increases. If rates increase during the closing process, your locked-in mortgage rate will remain the same.
- Low initial cost. Most mortgage lenders will allow you to lock in your rate for 30 days at no additional cost. This essentially allows you to lock in a mortgage rate without paying any extra money up front, as long as you can close the house within that time frame.
- Less flexibility. If mortgage rates drop after you lock in a rate, you could end up with a higher rate than is currently available. The exception is if you have a floating option, but this feature has an additional cost.
- Lock Fee Rate. Lenders usually charge an upfront fee if you want to lock in a rate for a longer period, like 75 or 90 days. You may also have to pay a fee if you want to extend the rate lock period, for example when closing is delayed.
What happens if rates drop after lockdown?
Let’s say you locked in a 30-year fixed mortgage rate at 5.25%, but during the close mortgage rates dropped significantly to 5.05%. If this happens, you have several options:
Discuss your options with your mortgage lender. A rate lock freezes interest rates on all available mortgage products for the day you locked in. You may be able to pay more discount points or switch to a shorter loan term (like a 15-year mortgage instead of a 30-year mortgage). ) to lower your interest rate. However, these rates will still be based on the day your lockdown period started.
“Some lenders may allow customers to switch to a lower rate if they haven’t selected a floating option,” says Grzebin. “Customers can ask their lender if they offer options to do so and if there are any fees associated with downgrading.”
Start over with a new lender to get a lower rate. You’d lose any appraisal fees you’ve already paid to the first lender, and switching mortgage lenders would likely delay closing. Pushing back your closing date can mean losing your home (and your deposit) if the seller has a strict deadline. Contact your real estate agent before making a decision that would void your purchase contract.
Let your lock rate expire. If the seller is willing to delay closing until your rate lock expires, you may be able to take advantage of lower rates. At this point, your lender will base your new rate on the current rate. However, there is always a risk that rates will go up or that the seller will refuse to extend the closing date. And some lenders may not let you relock at a lower rate anyway, says Grzebin.