Whether you're a homeowner jumping into the refinance market to try to take advantage of lower mortgage rates, or a homebuyer who qualified for a mortgage, found a great home to buy and signed a purchase agreement, there's at least one more question that you'll need to answer: "Should I lock in my mortgage rate?"
Mortgage rates fluctuate from day to day (and sometimes intraday), and not even the wisest Wall Street maven can know for certain what mortgage rates will be by the time your home 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.
A Mortgage Rate Lock-In Protects You
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 getting a home loan in late February 2022. A borrower applying for a 30-year fixed mortgage loan with interest rate of 3.76% was doing so at a time when mortgage rates had already risen pretty quickly. A decision needed to be made between two choices: "Should I lock in my mortgage rate today?" against "Should I wait to lock in later, in hope that rates fall?"
Over the next three weeks, mortgage rates rose by more than a half-percentage point, and borrowers who opted to not lock in the loan's interest rate turned out to have made a rather costly choice.
In this case, a rate rise from 3.76% to 4.42% on a 30-year, fixed-rate mortgage for $200,000, would translate into a monthly payment about $77 higher and over $27,500 in additional interest cost over the life of the loan. Instead of getting the lower interest rate they hoped for, or even the one at which they applied, this borrower would end up with a higher interest rate than if they had locked.
Aside from being costlier, rising rates can cause you trouble when qualifying, too. For example, at 3.76 percent, with a home purchase price of $200,000 and 20 percent down (and assuming typical taxes and insurance), you'll need $46,961 in income to qualify. At 4.42%, you'll need $49,585 -- and if you are already using all of your available resources to qualify and can't come up with the additional $2,623 in income, the amount of mortgage you can qualify to borrow will be reduced. In this case, that loan amount reduction would be $12,800, meaning you'll have to make up this difference in cash -- or quash the deal and start looking for lower-cost homes.
In either case, locking in your mortgage rate would have eliminated these troubles.
Interest Rate Lock In: Purchase vs. Refinance
Homebuyers and homeowners face different risks when deciding not to lock in their interest rate. As noted above, if rates increase sharply, a homebuyer who hasn't locked in their rate could find that they no longer qualify for a large enough mortgage loan to participate in their local real estate market, or need to come up with a much larger down payment to offset the loss of borrowing power. For homebuyers, it really is a case of "If you can't afford to lose, you can't afford to gamble", and the best path for homebuyers is usually to lock in their interest rate, typically as close to the time the mortgage application is placed as is possible.
For homeowners looking to refinance, the risk perspective is a little different. A gamble on not locking in the loan's interest rate that turns out poorly simply leaves them with the same home and same home loan they already have, although they may lose any non-refundable fees already paid. Still, the opportunity to improve their rate or attain other refinancing goals may have been at least postponed, but also possibly lost. While it's fine to want to try and hope for an even lower rate, locking in the interest rate is the only to make sure that the refinancing deal you want or need can actually happen.
What If I Think Mortgage Rates Will Fall?
Perhaps a better question is "Why do you think mortgage rates will fall enough in the next 30-60 days so allow you a chance to lock in at a better rate?" It's not uncommon at all that even when mortgage rates are in an otherwise long descending pattern there can be upward blips that can last several weeks before the downtrend resumes again.
If you do want to speculate that rates will fall over the next while, look for a lender that will offer you a "float-down" option. A float-down will allow you to lock in your interest rate today, but for a fee will allow you to re-lock at a lower rate should your hunch prove correct. That float-down fee might be a nonrefundable 0.25% to 0.5% of the loan amount ($500 or $1,000 using our $200,000 example above), so its not inexpensive. That said, should rates drop by a quarter of a percentage point, you might recover a $500 outlay in the first year of your loan.
Should I Lock My Mortgage Rate Today?
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, track current mortgage rates and trends at 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 or longer.
Ask lenders how long it typically takes to close a loan like yours. If the no-cost rate lock is 30 days and it will take 60 days to close your loan, your rate really isn't locked. Purchase a rate lock that meets your loan-closing time frame to be sure the rate you are planning on is the rate you'll get.
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, whether extensions are available and what they might cost. 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.
Hedge your rate-lock bet. If you think rates may fall in the next 30-60 days, ask your mortgage 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.
