When you are preparing to get a mortgage, one of the options available to you is to lock in your interest rate. This is when you sign a formal agreement with your lender that solidifies what interest rate they will use for your mortgage, and how many days you have to get your mortgage closed at that rate. Once locked, you will be able to obtain your mortgage at that rate, even if market interest rates change before your loan closing date.
Locking in your rate is often a wise choice, but you have to make the decision of exactly when to lock that rate. A rate lock is typically good for at least 30-60 days; however, longer rate locks are sometimes available for slightly higher interest rates or an upfront cost. Most borrowers wait until they have signed a contract on a home to lock their rate, because you never know how long it will take to find the right home and get an accepted offer.
Advantages of Locking Your Rate Early
- Protect yourself from an unexpected interest rate increase and change in mortgage payment, which would happen if market rates went up, and you were not locked in.
- Maintain your loan approval for the amount you want to borrow. If you have a high debt-to-income (DTI) ratio with your projected payment amount, you may have trouble with underwriting if rates and your monthly payment go up.
Disadvantages of Locking Your Rate Early
- Lenders may charge for a rate lock, either in up-front costs or by offering a rate that is slightly higher than the market interest rates. The longer you wait to lock your rate, the more it may cost.
- Rates may decrease before you close on your loan, leaving you with the higher rate you locked in, unless you paid for a rate lock that will float down to the lower rate.
- Your rate lock period may expire before you close on your home if you run into any delays in the closing process. If you are unable to close your loan or extend your rate lock, you will need to go with the current interest rates available.
- Paying for a longer rate lock period to give yourself a cushion can be more expensive than just waiting a little while before locking in your interest rate, even if that rate is slightly higher than what you could have gotten before.
How to Decide When to Lock in Your Mortgage Rate
Consider how much financial risk you are willing to take on. As soon as you lock your rate, you are eliminating most of your financial risk and transferring it to the lender, who has to honor the rate lock commitment even if market rates increase. If you are on a tight budget and would have a hard time qualifying for or paying your mortgage if the interest rate increases, then it's a good idea to lock in on the early side.
Pay attention to market dynamics. If interest rates have been very stable, it may not be as important to lock your rate early. If rates are decreasing and are likely to continue decreasing, you will probably want to wait to lock the rate. If rates are rising, it may be worth it to pay extra for a long rate lock period now.