When Should I Lock In Mortgage Rate?
If you begin purchasing a house and see news that mortgage rates are hitting new lows, you might consider losing these low-interest rates after completing the loan. The slight differences in interest rates can save you or costs thousands of dollars during the loan term. Locking in your mortgage prices allows you to fix costs in place until you close. This has great potential benefits, but it is not always the case. You should only lock in mortgage rate when there is no possibility of reductions in interest rates and the charges are worth the potential savings. Here’s how to choose.
What Does It Mean to Lock In Mortgage rate?
Mortgage rates of interest are dynamic and fluctuate daily or even hourly based on market conditions. If you recognize competitive mortgage interest rates when you start applying for a mortgage—it might no longer be there weeks or months later when you finally close.
Your financier may allow you to lock in mortgage rates to protect you from future interest rate changes (if you don’t want to miss the current low-interest rates). Locked rates are typically available for windows of 30, 45, or 60 days. Your interest rate will not change during this period unless your mortgage application changes, such as the amount you borrowed, your credit history, or the house appraisal value.
However, you need to be aware of some potential pitfalls, e.g., some lenders may charge a fixed rate fee, while others charge an extension fee if you do not close on time. In addition, rates may drop after you lock in yours, meaning you’ll lose on lower interest rates (or risk of paying a cost to unlock and receive lower interest rates).
What are the best times to lock in mortgage rate?
Although mortgage interest rates are constantly changing and unpredictable, certain situations could make locking a good choice:
- When interest rates rise: While mortgage interest rates fluctuate hourly or daily, they tend to move downward or upward over weeks or months. Start researching the latest mortgage interest rates. If they have been increasing: it could be wise to secure a mortgage before they grow further. On the other hand, declining interest rates could mean that locking in now causes you to miss out on a lower rate later. In addition, research whether market events or trends will affect the current or future prices. For example, interest rates were low during the pandemic conditions, but they increased again during the time of this article.
- When the Fed meets: The Federal Reserve regularly meets and sometimes adjusts the federal funds rate. These are rates at which the financial institutions borrow money, and thus, it affects the mortgage interest rates. Also, market interest rates tend to rise after the Fed meets and addresses the rate increase. So, it will help to research the plan and consider locking in a rate if your closing date occurs after a Fed meeting.
- When your budget is tight: Locking in interest rates will give you a better understanding of your monthly mortgage payments and provide you with a greater sense of financial assurance. If you don’t secure a mortgage and rates escalate between your home loan application and mortgage closing, your settlements could be higher than expected and harder on your budget.
Can I unlock the mortgage interest when the interest rate drops?
Locking in mortgage interest rates can either help or trouble you as your interest rate will remain fixed whether market rates rise or fall. Locked interest rates can protect you when the mortgage rate increases; however, you will miss lower price adjustments if rates decline.
Some lenders offer variable options that allow you to switch to the new lower interest rate even if you have already insured yourself. Remember to read the fine print first. You may pay more for this option, or you might have to pay additional fees if you decide to float down. It is crucial to calculate and ensure that potential interest savings justify locking fees and variable interest rates.
What Happens if My Rate Lock Expires?
Locking in mortgage interest rates is not permanent; it may take 15 to 60 days and sometimes longer to complete the process. Request your lender to switch to a longer time frame or extend your rate lock if you think the lock-in period is not enough. It is essential to note that some lending companies will charge a fee for this purpose. However, you will be expected to pay that price according to the current interest rates if your rate lock ends and you don’t extend it.
Get Your Credit Mortgage-Ready
Though market conditions play a significant role in mortgage interest rates, it’s essential to prepare the credit documents for the mortgage application process. The better your credit rating, the more likely you will receive a mortgage with low-interest rates. Therefore, take some time before applying for a mortgage to get your credit mortgage-ready.
Mortgage rates change all the time, but a lock in mortgage rate can keep you from worrying about that for a fee. Usually, if interest rates are low, it’s best to lock them in so you can keep them when you close on your new loan.