A mortgage rate lock allows you to keep your interest rate unchanged for a set period of time, usually between when your purchase offer is accepted and when you close on your new home. Locking in your rate can help you better plan for future mortgage costs, as rates can fluctuate widely while you’re under contract.
It’s difficult to predict mortgage rate trends, and no speculator can tell you exactly which direction rates are headed over the next week or month. A rate lock can mitigate the risk that rates rise unexpectedly, but it can also leave you stuck with a higher rate if market conditions change. By asking the right questions, you can determine the best time to lock your mortgage rate.
[Read: Best Mortgage Lenders]
When to Lock in a Mortgage Rate
It’s generally a good idea to lock in your mortgage rate with your lender of choice once you’ve gone under contract on a home, since there’s no way to definitively know which direction interest rates are headed. That way, your monthly payments won’t go up if rates rise during the closing process.
“If you find a house you love and you are comfortable with the payment on the home based on today’s rates, we suggest locking that rate so you have certainty of what your payments will look like on your home loan,” says Sean Grzebin, head of consumer originations at Chase Home Lending.
Take this example: During the month of April 2024, the average 30-year fixed mortgage rate rose from around 6.8% to 7.3% — that’s half a percentage point increase in the time it typically takes to close on a home. Homebuyers who went under contract at the beginning of April would be much better off if they locked their rate than if they hadn’t.
At the same time, a rate lock may keep you from getting a better interest rate if rates fall while you close on your loan. Homebuyers who are considering locking in a mortgage rate today run the risk that rates will be lower by the time they close a month from now. However, predicting mortgage rate trends is difficult for even the most seasoned economists. At the beginning of 2024, most forecasts showed that mortgage rates would fall throughout the year, but rates have stayed higher for longer than previously expected.
Put simply, there’s no way to try to perfectly time your rate lock, so focus on factors within your control. Here are a few things you should discuss with your lender when determining whether you should lock in a rate today.
How Soon Can I Lock in My Rate?
Most lenders won’t let you lock in your rate until you have a signed purchase agreement with the seller for the home that’s securing the mortgage. Given the current level of rate volatility, some lenders have begun offering “lock and shop” programs that allow you to lock in a rate while you’re still searching for a home. However, this type of rate lock feature may come at an added cost — and you won’t know the final homebuying costs until you have a property address.
Is a Mortgage Rate Lock Free?
Some mortgage lenders offer short-term rate locks at no charge, which means you can avoid paying for a rate lock as long as you close within this period. But they may not be free, technically, since an initial rate lock period is typically priced in to your interest rate and loan fees. Locking in your rate for a longer period, or extending your current rate lock period, usually comes at a cost. The fee for an extended rate lock is a set percentage of the total loan amount, such as 0.25% — that would be $875 on a $350,000 mortgage.
How Long Does a Rate Lock Last?
Rate lock periods usually last between 15 and 60 days, with longer-term rate locks being more expensive. Select mortgage lenders may offer long-term rate locks that last several months, typically reserved for borrowers who are buying new construction homes with indefinite closing timelines, but you’ll likely have to pay an additional fee to lock in your rate for an extended period. Some lenders may also extend your rate lock for one or two extra days at no charge around your closing date.
What Happens If Your Rate Lock Expires Before You Close?
If your closing is delayed past your rate lock period, you may either have to pay a rate lock extension fee or your rate will reset to the current prevailing rate. About one in 10 closings experienced a delay in the first quarter of 2024, according to the National Association of Realtors. Depending on why your closing is pushed back, the lender may waive the fee.
What Happens If You Don’t Lock In a Rate?
Your lender may give you the option to bypass a rate lock, or “float” your rate. If mortgage interest rates have been trending down for the past several 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 risk getting stuck with a higher rate.
Is There a Rate Float-Down Option?
Some — but not all — mortgage lenders offer a float-down provision, allowing you to take advantage of lower rates if they fall during the rate lock period. Lenders charge a fee for this service, and there’s no guarantee that rates will improve over time. Float-down options may only go into effect if rates fall significantly during your rate lock period, depending on the lender.
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Pros and Cons of Locking Your Mortgage Rate
Pros
— Reduced risk. The primary benefit of locking in a mortgage rate is that you’re protected from interest rate hikes. If rates rise during the closing process, your locked-in mortgage rate will stay the same.
— Low initial cost. Most mortgage lenders will let you lock in your rate for a 30-day period at no additional cost. This essentially allows you to lock in a mortgage rate without paying extra money upfront, as long as you can close on the home within this time.
Cons
— Less flexibility. If mortgage rates fall after you’ve locked in a rate, you may be stuck with a higher rate than what’s currently available. The exception is if you have a float-down option, but this feature comes at an extra cost.
— Rate lock fees. Lenders usually charge an upfront fee if you want to lock in a rate for a longer period, such as 75 or 90 days. You might also have to pay a fee if you want to extend the rate lock period, such as when closing is delayed.
What Happens If Rates Drop After You Lock?
Let’s say you locked in a 30-year fixed mortgage rate at 6.75% — but over the course of closing, the mortgage rates fell significantly to 6.5%. If this happens, you have a few options:
Discuss your options with your mortgage lender. A rate lock freezes the 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 (such as 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 lock period began.
“Some lenders may allow customers to move to a lower rate if they did not select a float-down option,” says Grzebin. “Customers can ask their lender if they offer options to do this and if there are any fees associated with moving to a lower rate.”
Start over with a new lender to lock in a lower rate. You’d lose any appraisal fees you already paid to the first lender, and switching mortgage lenders would likely delay closing. Pushing back your closing date may mean losing out on your home (and your earnest money) if the seller has a strict deadline. Communicate with your real estate agent before making a decision that would nullify your purchase agreement.
Let your rate lock expire. If the seller is willing to delay closing until after your rate lock expires, you may be able to take advantage of lower rates. At this point, your lender would base your new rate on the current prevailing rate. However, there’s still a risk that rates will rise again or that the seller will refuse to extend the closing date. And some lenders may not let you relock at a lower rate anyway, Grzebin says.
[Read: Best Mortgage Refinance Lenders.]
What Are Current Mortgage Rates?
Mortgage rates increased again this week, according to the Mortgage Bankers Association. Interest rates are expected to remain higher for longer until the economy cools down and inflation shows signs of slowing.
Looking forward, mortgage interest rates are still forecasted to decline somewhat throughout 2024, as the Federal Reserve projects rate cuts will begin sometime later this year. Here are the current mortgage rates, as of April 24:
— 30-year fixed: 7.24% with 0.66 points (previous week: 7.13% with 0.65 points).
— 15-year fixed: 6.75% with 0.64 points (previous week: 6.64% with 0.64 points).
— 5/1 ARM: 6.64% with 0.87 points (previous week: 6.52% with 0.6 points).
— 30-year jumbo loans: 7.45% with 0.56 points (previous week: 7.4% with 0.46 points).
— 30-year FHA loans: 7.01% with 0.94 points (previous week: 6.9% with 0.99 points).
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Should You Lock In a Mortgage Rate Today? originally appeared on usnews.com
Update 04/29/24: The story was previously published at an earlier date and has been updated with new information.
