Home prices rise, home inventory fluctuates, homebuyer demand increases – timing is a big part of homebuying and home financing. If you’ve been paying attention to any economic news, you know that for the last several months, mortgage rates have been climbing from their historical lows. So if you’re planning to purchase a home soon, what does it mean to lock an interest rate and when should you do it?
What is a rate lock?
A rate lock protects you, as a borrower, from rate fluctuations for the duration of a specified lock period. This means that your lender will guarantee you the quoted interest rate (and points, if applicable). So if interest rates go up, you still receive the lower rate, as the lender reserved it for you.
Many lenders offer free rate locks for the amount of time typically needed to process a mortgage, but borrowers who want a longer time span of protection incur additional charges.
What if rates do go down?
The downside of rate locks? If rates happen to fall during the lock period, you may not be able to take advantage of the lower rate opportunity. Certain circumstances do allow borrowers to "feel out" the direction of mortgage rates such as:
- An included "float down" provision in the original lock
- Rewriting the rate lock at an additional cost
With a "float down" option in your rate lock, your lender guarantees the locked-in rate if interest rates increased before closing. If rates fall, you have the right to lock-in at a lower rate, though a float down lock will come with a higher price tag, as it increases your lender's risk.
When can I lock in my rate?
The earliest point a borrower can lock in a rate is after the initial loan approval, though most borrowers wait until they have found a home to purchase to allot enough time for loan processing within the terms of their rate lock.
When should I lock in my rate?
Every borrower's individual circumstances dictate the best time to lock in their mortgage rate. If even a small uptick in mortgage rates will affect your homebuying budget, you should lock in your mortgage rate as early as possible.
Talk to your mortgage banker about how interest rate fluctuation might affect your mortgage circumstances.
For more information about home buying and home financing, in general, download our free Mortgage 101 Handbook, a great guide for first-time buyers.