If you’re thinking about buying a home, getting the lowest possible interest rate is crucial; low interest rates mean a lower total monthly payment, and lower payments over the life of the loan. On a $250,000 house, a 0.5% increase in your interest rate adds about $75 to your monthly payment, and over the life of a 30-year loan can add more than $25,000 to the total you will pay. Rates change over time, so for some people it makes sense to lock in an interest rate before you’re ready to close on your home.
Many lenders offer the opportunity to lock in, or freeze your interest rate for a certain amount of time before your loan officially closes. Even if interest rates go up you will get a mortgage at the lower rate you locked in. For traditional home loans you might lock it for a couple of months, while construction loans offer the chance to lock in a rate for several months while the home is built. There is a fee associated with locking in a low rate, though, so it’s not the right choice for everyone.
As the term suggests, once you “lock in” an interest rate (and pay any fees associated with doing so), your rate will not change. If rates go up in the meantime that’s a good thing, but if rates go down, you are still getting the higher rate you locked in. Some lenders do offer the chance to reduce or “float down” your rate once, and you can void a rate lock if something about your loan changes—such as the property value appraisal, your income, or the length or terms of your mortgage—but those things are unusual in the home loan process.
Unfortunately nobody really knows what will happen with interest rates (anyone who tells you otherwise is not being truthful), so trying to predict what they will do in the future is impossible. If you get approved at a low rate that you want to protect, or recent trends suggest that rates may go up, that’s the time to consider a rate lock.
If you do go ahead with a mortgage rate lock, make sure you lock it in long enough to allow time to close your loan—the average closing time is about 45 days, but your lender can provide you with an estimate of how long it will take and then you should add in a few extra days just to be safe. Most lenders charge a fee for this service, so before you go ahead make sure you know the terms and costs. If your interest rate lock expires before closing, you will be subject to whatever the current rate is, and any fees you paid for the lock is probably not refundable.
Talk to our experienced loan officers at Integrity First Lending today to find out if a mortgage rate lock is right for you.