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The most important aspect of a mortgage is the interest rate, which determines your monthly payment and the total lifetime cost of the mortgage. The rate lock sets your interest rate for a specific period of time. Deciding on when to lock your rate will be an important decision that could save or cost you thousands of dollars if not carefully considered. Read on to find out when you should lock your rate.
What is a Mortgage Rate Lock?
At some point in the mortgage application process, your mortgage lender will ask if you want to lock in an interest rate. A mortgage rate lock is a guarantee from the lender that if you meet certain criteria, you will receive a mortgage at the interest rate you locked in. The rate lock guarantee will last for a predetermined period of time.
While it is your option as the mortgage applicant to decide when you want to lock in your interest rate, lenders generally encourage borrowers to lock in a rate early in the application process. Until you lock your interest rate, the rates being offered by your lender are subject to change due to market fluctuations. With a rate lock in place, you can properly budget for the future costs of your mortgage as you move through the application process.
Locking in an interest rate doesn't usually cost anything. When you decide to lock in your rate, you may be presented with a few choices. One rate will be "at par" or without additional cost, but you may also be presented with options to lower the par rate by paying additional fees or to accept a higher rate and receive a credit that reduces your closing costs.
Fees may also come into play if your rate lock expires before the closing has taken place. If your rate lock has expired and rates have increased, you may have to pay extension fees to extend the rate lock period. Rate lock extension fees can be quite costly, depending on how the market has shifted, making it important for you to try to close within the rate lock period.
When Should You Lock Your Mortgage Rate?
Locking in your mortgage rate at the right time can save you thousands over the life of your loan. Although there's no crystal ball that can predict the future behavior of interest rates, it always helps to stay up to date on what rates look like before you buy. You can stay informed by following Freddie Mac's weekly national mortgage update or checking out our average mortgage rates page.
Interest rates are driven by economic factors that are often unpredictable, and mortgage rates are subject to change every day. There are a few factors in the marketplace you can look to that may shed some light on how interest rates will move. The jobs report issued by the U.S. Bureau of Labor Statistics on the first Friday of every month and the Federal Reserve's policy meetings—which take place every six to eight weeks—can be good indicators as to whether interest rates will increase or decrease.
Mortgage applicants often hesitate to lock in an interest rate, based on a fear of acting too soon and missing out on a lower rate. If you do lock your rate and rates fall before you close on your home, you may still be able to renegotiate with your current lender. While most lenders are hesitant to lower a locked rate, it costs nothing to make such a request.
At the time of your rate lock, you may be also able to select a float-down option. For a fee, float-down options allow you to lower your locked rate if interest rates on the market fall during your lock period. If a float-down is unavailable, your other option is to lock a rate with another lender. While it may seem difficult to have to go through another application process, it may be worthwhile if the rates have dropped significantly.
How Long Can You Lock a Mortgage Rate?
A typical rate lock lasts for 30 days, although 15-, 60- and 90-day locks are also common. The length of the rate lock period is usually tied to the time it takes to get a mortgage approved and ready to close. The longer a rate lock period, the higher the interest rate or the more fees you will have to pay to maintain your rate. In the case of a new construction loan that may take a year or two to close, rate lock periods at some lenders can extend up to 24 months.
Choosing an interest rate lock period will come down to two factors: when you can close on your mortgage and what rates are being offered at what cost for different rate lock periods. The key is to select the shortest rate lock period that will allow you enough time to comfortably close. As discussed above, failure to close on time may result in costly extension fees. Choosing an unnecessarily long rate lock period will also result in more fees, or a higher rate than you would have received for a shorter rate lock period. Finding the right timing is essential to ensure a smooth and economical mortgage experience.