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A mortgage rate lock enables you to lock in the interest rate on your home so that it doesn't rise between the time you applied for a mortgage and the time you closed. Even if interest rates rise after you've locked in your rate, you'll be able to stick with the lower rate. On the flip side, if you lock in your rate and then interest rates fall, you could be stuck paying a higher rate.
Locking in your mortgage rate during the popular spring home-buying season can be beneficial for a variety of reasons, but it's essential to carefully consider your personal financial situation and the housing market conditions before locking in your rate.
Is now a good time to lock in my rate?
Mortgage rates fell for the second straight week, and many borrowers are considering taking advantage before mortgage rates go back up. Currently, the rate on a 30-year fixed mortgage sits at around 6.35%. Although this is still significantly higher than where we were one year ago, there is hope that the Fed may pause interest rate hikes as inflation cools down.
How does a mortgage rate lock work?
A mortgage rate lock is an agreement between you and your lender that allows you to lock in a specific interest rate on your mortgage. By locking in your interest rate, you can guarantee that it will not change during a specific period, usually 30 to 60 days, while your loan is being processed. Knowing that your interest rate will remain the same and your monthly mortgage payment will not unexpectedly increase can give you peace of mind during the homebuying process.
For example:
Consider a $400,000 home financed for 30 years at 6.5%, with a 20% down payment:
Loan amount = $320,000
Interest rate = 6.5%
Loan term = 30 years
Monthly payment (principal and interest) = $2,020.88
In this scenario, just a quarter point (0.25%) interest rate rise will increase your principal and interest payments up $53 a month, to $2,073.23. Over just five years, that additional amount will add up to $3,180! Therefore, it can be a good idea to lock in your rate at a time when interest rates are expected to keep rising.
It's important to note that a mortgage rate lock typically comes with a fee, on average between 0.25% to 0.5% of the total mortgage amount. For example, if you're borrowing $320,000 for your mortgage and the rate lock fee is 0.25%, you could expect to pay a fee of $800. If your lock period ends before you’re able to come to a final decision and you need to extend the lock, expect an extension fee as well, usually about 0.375% of the total loan amount.
Why the spring season might be a good time to lock in your rate
As the spring season comes to an end, many people are considering buying a new home. It's no surprise, therefore, that 40% of all home sales occur between April and July. There are several reasons why spring is a hot homebuying period, including:
- Better weather: Springtime brings milder weather in many parts of the country, which can make house hunting and moving more pleasant.
- More inventory: Many homeowners choose to list their homes for sale in the spring, which can lead to a greater selection of homes for potential buyers.
- End of the school year: Parents often prefer to move during the summer when their children are out of school, so buying a home in the spring allows them to complete the homebuying process in time for the summer months.
- Home maintenance: Spring is a good time for potential buyers to check for any issues with the home's HVAC system, roof, or foundation, as well as any potential water damage from snowmelt or spring rains.
- Tax refunds: Many people receive tax refunds in the spring, which can provide additional funds for a down payment, closing costs, or other homebuying expenses.
This spring, in contrast to previous years, there are fewer sellers listing their homes. This lack of inventory can further drive up prices and make it challenging to find the right home within your budget. If you've found the right home for you and your family, the time might be now to lock in your rate, before it goes to another qualified buyer.
Pros of locking in your mortgage rate:
If you've found your dream home this spring homebuying period and are considering locking in your rate, here are the key benefits of doing so:
- Protection against rate increases: If interest rates rise after you lock in your rate, you will still get the lower rate you locked in with your lender. If rates increases, this can potentially save you thousands of dollars over the life of your loan.
- Ability to budget effectively: Knowing your monthly mortgage payments in advance can help you budget more effectively and plan for other expenses with greater confidence.
- Peace of mind: Locking in your mortgage rate can free up your mind to focus on other tasks related to the homebuying process, like preparing for your move and beginning home renovations. (See Best Home Improvement Loans of May 2023).
Though locking in your rate can provide you protection against market volatility, it also has its drawbacks to consider.
Cons of mortgage rate locks:
Before committing to locking in your mortgage rate, consider the following:
- Upfront costs: Some lenders may charge a fee for locking in your mortgage rate and for extending the lock period.
- Missed opportunities for lower rates: If interest rates drop after you lock in your rate, you will be stuck with the higher rate you locked in. This means you may miss out on opportunities to secure a lower rate if you don't time your rate lock correctly.
- Limited flexibility: Once you lock in your mortgage rate, you may have limited flexibility to make changes to your loan, such as adjusting the rate or changing the term. This means you may not be able to take advantage of better rates or terms that become available in the future.
These drawbacks aren't fast-and-hard rules, however. Many mortgage rate lock contracts come with a "float-down" option, which means that if rates go down, you can take advantage under certain terms and conditions. Additionally, if your borrower profile changes (for example, if your credit score goes down), the lender is liable to break your lock.
Considerations before locking in your rate
When you're considering a mortgage rate lock, the most critical thing you can do is research interest rates and current market conditions. This will help you determine if now is an appropriate time to lock in your rate, based on your specific financial situation. There are several factors that affect rate conditions, including:
- The Federal Reserve's interest rate decisions: While mortgage rates remain high, it is essential to consider how they will affect the lifetime of the loan. Although even the most seasoned economists can't forecast mortgage rates with 100% accuracy, it's crucial to keep up with Fed interest rate decisions. If rates suddenly take a sharp decrease and you've locked in your loan at a higher rate, you could lose money.
- The location of the real estate market you're in: Specific cities and areas have been hotter than others, especially since the pandemic. Some cities experienced significant growth, but are now experiencing a correction period. These factors can play a role in determining the ideal time to purchase a home. For example, if home prices in your city are in decline, now might be a good time to lock in a rate before they increase again in the future.
Getting preapproved for a mortgage can help you get a sense of what your mortgage will look like and what you can and can't afford. It's always recommended to research and compare the best mortgage rates to make an informed decision.
Conclusion
Deciding when to move houses is a very personal and emotional financial decision. Rushing the decision can result in poor choices. Therefore, it's essential to make sure you're ready to take on homeownership costs beyond the down payment. You must have your finances ready and your credit in good shape. Your debt-to-income ratio must be under control, and you should have stable employment and income. Keeping up with Fed interest rate decisions and researching and comparing the best mortgage rates can help you make informed decisions.
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Mortgage Loans
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