The interest rate on your mortgage loan makes a huge impact on the size of your monthly mortgage payments. Here’s an example: If you take out a 30-year fixed-rate mortgage loan of $200,000 at an interest rate of 5.5 percent, your monthly payment – not including taxes and insurance – will come out to about $1,135.
If you take out that same loan at an interest rate of 4 percent, your monthly payment will fall to about $954, not including taxes and insurance.
It’s clear, then, that a lower interest rate can make borrowing mortgage dollars far more affordable. That’s why home buyers will often lock in an interest rate after signing a contract to buy a house and before their mortgage loan closes. The lock means that mortgage lenders will lend you money at a certain interest rate no matter what rates do before your loan officially closes.
For instance, say you and the seller of the home you want to buy sign a contract next week. Your lender might offer you a 30-year fixed-rate mortgage loan at an interest rate of 4.5 percent. If you lock in that rate with your lender, your lender can’t raise your rate even if interest rates on 30-year fixed-rate loans jump to an average of 5.3 percent in the 30 or so days it takes for your loan to close.
Lenders will usually lock in your rates for 30, 60 or 90 days. You might have to pay points, though, for longer locks. That depends on the policy of your lender.
Of course, the challenge lies in knowing when to lock in your rate. Most borrowers do this immediately after signing a contract to buy a home. Few lenders, if any, will let you lock in rates before you have a signed contract.
But what if you’re worried that interest rates will fall after you lock in your rate? You really have just one option: Don’t lock in your rate. Know, though, that you are taking a chance. Rates might not fall. They might even rise. A good place to keep track of current interest rates is the Freddie Mac Primary Mortgage Market Survey, which you can find here.
No one knows what interest rates will do from one week to the next. Lock your rate if you feel comfortable with it. That way, you know exactly what it will be at closing time.