When Should You Lock in a Mortgage Interest Rate?

Every homebuyer wants the best price and the lowest possible mortgage payment. This is why we work with a real estate agent and shop around to get the best value for our money, and many of us take steps to improve our credit in order to qualify for the most favorable interest rate. Like the sale price, interest plays a big role in the cost of a home. This is the fee you pay a bank, and the higher your mortgage rate, the more you’ll pay over the life of the loan. It comes as no surprise that buyers prefer the cheapest rate, and to acquire the best loan rate, some buyers lock in their interest rate. A rate lock isn’t required when buying a house, but recommended if you don’t want your rate to increase before closing. Mortgage rates can (and often do) change on a daily basis. If you lock your rate, your lender is obligated to honor the agreed-upon rate, regardless of whether rates change before your scheduled closing. For example, your lender may quote a rate of 3.89 percent today, but the rate may increase to 4.1 percent by the time you’re ready to close in the next few weeks. It’s not a huge jump, but enough to slightly increase your mortgage payment. A rate lock protects you from any mortgage rate increases. Understand, however, that if rates drop before your closing, you may not be able to take advantage of lower rates. So, carefully decide whether locking is right for you. Locking your rate isn’t free and it can cost as much as one point or one percent of the mortgage loan, paid at closing. You can lock your rate for 30 days, 45 days or 60 days, it really depends on the circumstances. When to Lock Your Rate You can lock your rate anytime after you’re pre-approved for a mortgage. However, since there's no way to guarantee how long it’ll take to find a house and close on a loan, it’s best to wait until after you’ve signed a purchase agreement, so you don’t waste a good portion of your lock period searching for a home. Don’t make the mistake of locking your rate too early. If it takes longer than expected to find a new home, the lock period can expire and you could miss the opportunity to take advantage of a low rate. Work with your lender to determine the best time to lock your rate. Since you'll pay more for a longer lock period, you’ll want the shortest period possible. Even with a signed purchase agreement, it’s difficult to know exactly when you’ll close on the mortgage loan. It all depends on your mortgage lender and the bank’s current activity. If the bank isn’t too busy, you might be able to close within the next two-to-four weeks, and you may only need a 30-day lock. If the bank has a lot of closings ahead of yours, it might take longer, and you may need a 45-day or a 60-day lock. “There's no perfect time to lock a loan, but a lender or mortgage broker can check with the loan processor to get a feel for how long it will take to have the loan go through underwriting,” says Brent Mendelson, a senior loan officer with Monarch Mortgage in Rockville, MD. Do You Need a Rate Lock? Although a rate lock is convenient, it isn’t necessary for every borrower. Mortgage rates influence purchasing power, and for some people, a low rate is the only way to qualify for a specific mortgage amount. In this case, even the slightest rate increase can put the mortgage in jeopardy. If you're in this situation, a rate lock might be the only way to guarantee keeping the home within an affordable range. On the other hand, if mortgage rates have been steady for a while, and if a rate increase won't impact affordability, you may decide against a rate lock to avoid the fee. A home purchase is a long-term commitment, and it's important that you're able to afford your mortgage payment for the next few decades. Getting the right sale price is crucial, but you also need a favorable interest rate. A rate lock might be the answer if you need an affordable rate.