Among the more nerve-wracking decisions when getting a mortgage is when to lock in the interest rate. Rates rise and fall, of course, and even small fluctuations can affect your monthly mortgage payment, and create a huge difference in the interest over the term of the mortgage. Yet in an era when rates on all credit, including mortgages, are rising, you at least needn’t worry as much that the available mortgage rates will drop after you lock in what you will pay. Instead, your decision should be driven more by how early you want to lock in, and for how long, to avoid the possibility of your lock expiring, and rates then being higher than what you have been guaranteed to pay.
If you’re shopping for a home, here are some realities to shape your decision about when and how to lock in a mortgage rate.
Rates are near historic lows, but are rising. Many homeowners today will barely, if at all, remember the days when mortgage rates ran into the double digits. In 1981, mortgage rates hit a peak of nearly 19%. Since then, the overall trend has been to declining rates, including in the period since the housing crisis in 2008, when rates have consistently been below 6%. It’s been more than 25 years since the average annual mortgage rate was in double-digit figures, and it was only just so in 1990--at 10.13%.
But rates have been back on the rise again since March 2017, following the first hikes in the federal funds rate since 2015. Further, the Fed chairman has all but announced that rates will continue to rise in 2018, and analysts also predict that will be the case. That makes it unlikely now that you’ll lock into a mortgage, only to see rates drop before the lock expires.
There’s flexibility on how long you can lock in for. The traditional wisdom about when to lock in a mortgage rate is to choose the shortest period in which you can comfortably close on the purchase of your new home. One confounding factor is that the closing process, and when exactly it will happen, is unpredictable, and subject to such curves as complications at the seller’s end and late discoveries about a problem in the home you’re buying.
At a time when rates are dropping, it can make sense to lock in fairly late, not only to increase the confidence the closing will occur when expected but also to limit the time in which more favorable rates may materialize. When the trend is reversed, however, as is the case today, there’s a stronger case to lock in early, and for a longer period, rather than a shorter one, to minimize the likelihood that rates will rise during the lock period. There’s a snag, however. The customary rate lock is for 30 days, but you can also double or even triple that period fairly easily. The longer the lock, though, the higher the interest rate, Also, additional fees may kick in, and further boost the cost of a longer lock-in compared with a shorter one.
That said, ValuePenguin mortgage analyst Chris Moon says it might be worth considering the longer period in the current environment. “Typically, longer lock periods mean accepting a higher interest rate. But since rates look set to rise continuously in 2018, even a 60- or 90-day lock is more likely to give you a lower rate compared to the market by the time the lock expires.”
A time of rising rates also reduces the risks should you need to extend your lock because the closing has been delayed. If your rate lock has expired and rates have increased, you may have to pay extension fees to extend the rate lock period. While those fees can be quite costly, they still may amount to less out of your pocket than if you’d chosen a shorter period, and then been forced to take a higher rate on the open market when it expired.