When Should You Lock-In Mortgage Interest Rates?

House Lock KeyAfter spending weeks or even months shopping for a mortgage loan, you have finally found something that suits you: a mortgage loan with a great interest rate and low upfront costs. Fast forward a few weeks and right before closing on the loan, the interest rate increases all of a sudden. This isn’t the lender trying to scam you; it’s just the way things work. The latest mortgage rates can fluctuate, sometimes significantly, from one day to another. This can be avoided by locking in your mortgage interest rate.

What is a Mortgage Interest Rate Lock?

By locking in your interest rate, you are guaranteed the interest rate that your lender has quoted you when you applied for the mortgage loan. Even if your loan application is still being processed, by locking in the interest rate, you will make sure that you won’t be caught by surprise if the rate increases in the near future. Of course, the interest rate can also decrease, which means that you will be missing out on a lower rate if you lock-in early.

The lender will lock in the interest rate for a specified period of time if you ask him. Typically, the interest rate can be locked for periods between 15 and 60 days. The shorter the lock period, the less risk there will be for the lender, meaning that you will receive a better interest rate.

Steps to Locking-In a Mortgage Interest Rate

A mortgage interest rate lock-in can prove to be very beneficial in case the interest rates increase while your loan is being processed, but it can also be a disadvantage to you if the rates decrease. No matter when you decide to lock-in the interest rate, you should always know how this is done. Here are the steps to locking-in your mortgage interest rate:

  1. Make sure you understand what the difference between an interest rate quote and a rate lock is. The interest rate quote is the estimate given by your lender of what your rate will be. The rate quote will be affected by any changes in interest rates that happen on the market. Your income and credit score can have an influence on the rate that you were quoted, meaning that the interest that you will be paying on your mortgage will most likely be different than the percent that your lender has quoted. If you lock-in your interest rate, the rate won’t change during the lock-in period, no matter what happens in the market. 
  2. The loan process can take a fairly long time, so having all of the necessary documents ready is very important when locking-in your interest rate. Rates can be locked for 2 months or even more, but if the loan is not closed during that period, the interest rate lock expires and the rate that was agreed upon is no longer valid. By doing a little research, you can find out how long processing a loan typically takes in a certain area and plan accordingly.
  3. The interest lock-in must be in writing. In the written agreement, all important information much be enclosed, such as your name, your lender’s name, the loan amount, the interest rate that is being locked-in, and the lock-in terms and fees. Make sure you read and understand everything that is written in this document, including the fine print.
  4. Some lenders provide an option that helps you get a lower interest rate if it becomes available during the lock-in period. If your lender has this option available, you should take it, but be aware that you will most likely have to pay a fee, and you will only be able to use this option once. This option may also force you to take a higher interest rate if the rates increase.

When to Lock-In the Interest Rate

You can lock-in your mortgage interest rate as soon as your loan is approved for the first time, but most people will wait until they find a home. There could be a few weeks between the time you get approved for a loan and the time when you actually find a home that you are willing to buy, so locking in only after that will reduce the chances of the lock-in expiring before the loan is closed. Also, a larger interest rate lock costs more, with 60 days locks costing around 1 percent of the total loan amount.

Because interest rates can increase or decrease at any time, there is no perfect time when you should lock-in the interest rate. The only way you can predict an interest rate increase or decrease is by researching forecasts, but interest rate forecasts are not always accurate.

Locking-in early is generally the better choice, if you are happy with the interest rate that your lender has quoted you, especially for those whose budgets can be severely affected by even a slight increase in interest rates. What is most important when locking-in an interest rate is that you work with your lender to determine if your loan will be able to close before the interest rate lock-in period expires.

Deciding when to lock-in the mortgage interest rate is not an easy choice to make and can end up causing you a lot of headaches and stress. Locking-in before the interest rates increase is great, but they might also decrease, in which case you won’t get to secure the lower interest rate. On the other hand, not locking-in before the interest rates increase will cause you to lose money, and can even cause you to not qualify for the loan anymore. No one can know when the ideal time to lock-in your interest rate is, so if you are satisfied with the interest rate that you receive initially, it is better to lock-in early, rather than take the risk of rates going up in the future.

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