Interest rates fluctuate daily and sometimes even more than once a day. If you have your eye on a specific interest rate, you may be anxious to lock it in when it’s available. Before you do, you should know the right time to lock an interest rate.
What is a Locked Mortgage Interest Rate?
A locked mortgage interest rate means you’ve chosen your interest rate for your mortgage. Once you lock it, that’s it, except in certain circumstances. Your lender will draw up your mortgage documents and calculate your mortgage payment using this interest rate.
Interest rates may increase or even decrease while you wait to close on your loan. But if you’ve locked your rate in already, it’s yours for the taking. Before you lock in an interest rate, you’ll want to choose your timing wisely. Locking it in too soon could leave you without a locked interest rate at closing. Waiting too long, though, could leave you at the mercy of the market rates, which could be higher than you hoped.
How do you Time Your Mortgage Interest Rate Lock?
Before you can lock your interest rate, you need to have loan approval. That’s a universal rule. You should also wait until you’ve found a home to purchase. The less time that you can lock the interest rate for, the less it will cost you. The average borrower locks an interest rate for 30 days. This means waiting until you are within 30 days of closing to lock the rate.
If you lock the rate too soon, it could expire. An expired rate lock typically puts you at the mercy of the market rates. Most lenders charge the worst-case scenario between the rates at the time and your locked rate. If you lock it too late, you are pressured for time. You can’t close on the loan until you have a locked interest rate. This could put you in a bind.
Keep in mind that some lenders do offer the opportunity to extend a locked rate if you talk to them before it expires. If you know there’s a delay with the purchase or an issue with your loan, the lender may charge 0.375% – 0.5% of the loan amount as an extension fee.
What Does it Cost to Lock an Interest Rate?
Some lenders don’t charge anything to lock an interest rate initially. If the rate expires, it may be a different story. Lenders that do charge, typically charge 0.25% of the loan amount. In other words, you pay a quarter of a point to lock the rate.
You may also pay for the locked interest rate with a higher interest rate. In other words, the longer you need to lock the rate, the higher the rate you will get. A 30-day lock will typically be lower than a 60-day lock, for example. That’s why it pays to wait until you are closer to closing, but not too close.
How Long Can you Lock an Interest Rate?
The average rate lock is for 30 days, but you can find them for as long as 45 or 60 days. If you need to go beyond the 60-day lock, this is when you’ll generally pay for the lock. Lenders either charge you a percentage of the loan amount or they increase your rate to make up for the risk of a longer lock period
What if You Lock a Rate and Rates Drop?
Once you lock your interest rate, that’s it, technically. Some contracts do allow you the provision of ‘floating down’ the interest rate. This provision allows you to take the lower interest rate if rates drop, but only once. In other words, if you use the ‘float down’ today to take advantage of a lower rate but then rates drop again tomorrow, you can’t use it again.
What Happens if you Lock a Rate and Rates Increase?
The good news is that if interest rates increase, you don’t have to worry about it. You won’t have to pay the higher rate because you locked your rate. Now, if your rate lock expires and interest rates increase, then it’s another story. In most cases, you may get stuck with the higher market rate because your lock expired. That’s why it’s so important to choose the right lock period.
Locking your interest rate is an important step of the mortgage process. Choosing the right time will help you grab the best interest rate while avoiding unnecessary fees. Give careful consideration to when you lock your interest rate to avoid paying extension fees or worse yet, getting stuck with a higher market rate.