Should I Lock My Mortgage Interest Rate?
When you’re buying a house, there’s a lot of new jargon you have to learn – aka “private mortgage insurance” (PMI), “multiple list service” (MLS), “annual percentage rate” (APR), and many more terms you might not have heard before.
As you move along in the home buying process, one of the new phrases you’ll hear a lot is “mortgage rate lock.” But what does that mean exactly? And should you do it? What are the pros and cons?
Below we explain what it means to lock your mortgage rate, why you might want to consider it, and what the current market conditions look like.
What Does Locking Your Mortgage Rate Entail?
When we talk about a “rate lock,” they’re usually talking about locking in the interest rate on a mortgage. This typically happens once you have a binding purchase agreement for the home that you’ve picked out.
Interest rates change all the time, and they’re constantly changing because of monetary policy (the raising and lowering of the federal funds rate) as well as inflation and the overall national and global economy. They change so often that you may look at interest rates one afternoon and they could be different the next morning.
When you “lock in” a mortgage rate, you’re guaranteed an interest rate for a specific period of time from your lender. On a typical loan, you can do a 30-, 45-, or 60-day rate lock, which means that your interest rate will stay the same during that period.
After that rate lock period expires, your interest rate is subject to change with the market. You can extend your rate lock, but there might be an extra charge associated with that so it’s a good idea to ask your lender up front about rate lock extension fees.
While 30–60 days is usually enough time to close on your home purchase, there are some cases where your time might run out. You could potentially have title problems, appraisal issues, or anything else that might pop up during the closing process that might cause you to miss the closing date, which could make an extension necessary.
What If Interest Rates Go Down After You’re Locked In?
Because the interest rates are changing rapidly, it is possible that they could go down while you’re locked in, but you’d be out of luck if you’re already locked in, says Kristey Ray, branch manager at Accurate Mortgage Group in Spring Hill, Tennessee.
“You are locked in even if the rates go down. I explain to my clients up front that your options are to lock or not lock,” says Ray. “If you don’t want to lock you have to understand that rates can go down. But that’s the risk you take, and some people think it’s better to take that risk.”
In other words: once it’s locked, it’s locked. But on the plus side, knowing what your interest rate and payments are going to be like will help you be able to plan better and know what’s expected in the months and years ahead.
What Are the Current Market Conditions?
If you’re getting ready to buy a house, you might be wondering: is today a good time to lock in my rate? What is the market expected to do in the next year?
Although there’s not a fool-proof way to know, we can say with some certainty that the overall trend in 2018 is that interest rates are going up, which could make it a good idea to lock in your rate as soon as possible.
The 10-year treasury note is increasing this year, says Ray. “It’s going up and is forecasted to continue to go up.”
It’s great to pay attention to the markets and try to see if you can get the best rate you can, but ultimately, not locking your rate opens you up to the susceptibility of the market.
“Rates can change all the time. You don’t know how fast, and it’s really about whether or not you want to take a gamble,” says Ray.