You signed a purchase agreement on your dream home, researched today's best mortgage rates, and qualified for a home loan. Just when you thought the hard part was over comes a conundrum: Should you lock in the mortgage rate?
Mortgage rates fluctuate from day to day, and not even the wisest Wall Street maven can know for certain what mortgage rates will be by the time your loan closes. If you lock in your mortgage rate, you risk losing out on savings if rates go down... but if you don't lock in your rate, you risk getting stuck with higher mortgage payments if rates go up.
Mortgage Rate Fluctuations: Small Change, Big Difference
What makes this a nail-biter is that small rate differences can add up to big money over the course of a loan. Usually, it will take between 45 and 60 days (sometimes longer) to close a mortgage loan when you are buying a home. Over that six- to eight-week period, a lot can happen to mortgage rates. Consider a borrower in January of 2018; in mid-January, average 30-year fixed rates were just over 4 percent. Fast forward two months and they were closer to 4.5 percent.
In such a case, a rate rise from 4% to 4.5% on a 30-year, fixed-rate mortgage for $200,000, would translate into a monthly payment about $59 higher and over $21,000 in additional interest cost over the life of the loan.
Aside from being costlier, rising rates can cause you trouble when qualifying, too. For example, at 4 percent, with a home purchase price of $200,000 and 20 percent down (and assuming typical taxes and insurance), you'll need $46,674 in income to qualify. At 4.5%, you'll need $48,655 -- and if you are already using all of your available resources to qualify and can't come up with the additional $2,000 in income, the amount of mortgage you can qualify to borrow will be reduced. In this case, that reduction would be $11,400, meaning you'll have to make up this difference in cash -- or quash the deal and start looking for lower-cost homes.
In both cases, locking in your mortgage rate would have eliminated these troubles.
So what should you do? Consider the following:
• Follow the market carefully. Both before and during your mortgage process, keep up with the latest financial news, get the latest mortgage rate statistics and trends from HSH.com and check HSH's two-month mortgage rate forecast. Decide which gamble makes the most financial sense for you. When rates are close to historic lows, most buyers choose to lock in, rather than betting rates will go down further.
• Learn when you can lock in your mortgage rate. Most often, the rate can be locked at the time you place the application, but later times may be available, such as when the loan commitment is issued (usually when the appraisal of the property comes back), or in some cases at any time up to perhaps 5 days before closing (sometimes called "float to close").
• Find out how much locking in your mortgage rate will cost. Lenders often let you lock in the rate for free for 30 to 45 days; however, they might charge a fee, typically .5% of the loan, for locking in for 60 days.
• Get your mortgage rate lock in writing. Don't settle for verbal assurances from your lender, and make certain you get details on what will happen should the rate lock expire. If you do this when you apply, you should see the terms of the rate lock noted on page 1 of your Loan Estimate disclosure form in the upper right-hand corner.
• Watch the clock. If you're within a week of the mortgage lock-in expiring, confirm that your closing will occur on time. If there is any doubt, ask if the lender will extend the lock-in period. In some cases, short-term extensions are free, but longer ones (e.g. 15 days) will incur a fee.
• "Should I lock my mortgage rate today?" Our advice, more often than not, is to lock your rate. Simply stated "If you can't afford to lose, you can't afford to gamble." Mortgage rates are notoriously fickle, and tend to rise much more quickly than they fall. That being the case, if a small rise in rates is enough to ruin your chance at buying or refinancing a home, you should strongly consider locking in the rate which will make your deal work, no matter what it might be.
• You can hedge your bets, too. If you think rates may fall in the next 30-60 days, ask your lender about a "float-down" option. For what is usually a small fee, you can lock in today's rate, but if rates actually do decline by a given amount, you can re-lock at the new, lower interest rate.
Learn more about the lock-in process with A Consumer's Guide to Lock-Ins.