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If you're starting the homebuying process and see news that mortgage rates have hit a new low, you may worry that you'll miss out on these low rates by the time you close on the loan. After all, even a tiny difference in rates can save you—or cost you—thousands of dollars over the life of a loan. Locking in your mortgage rate allows you to freeze an interest rate in place until you close. This has some big potential benefits, but it's not always the right decision. You should only lock in your mortgage rate if it's unlikely rates will drop further and if the fees are worth the potential savings. Here's how to decide.
What Does It Mean to Lock In a Mortgage Rate?
Mortgage interest rates are dynamic and fluctuate daily or even hourly based on market conditions. If you see a competitive mortgage rate when you start your mortgage application, it may no longer be there weeks or months later when you finally close.
If you don't want to miss out on the current low rate, your lender may allow you to lock in the rate, which insulates you from future rate changes. Locked rates are usually available for a window of 30, 45 or 60 days. During this time, your rate won't change unless something changes on your mortgage application, such as the amount you're borrowing, your credit score or the home's appraised value.
This process comes with potential pitfalls that are important to keep in mind, though. Some lenders charge fees to lock in a rate, and others charge fees to extend them if you don't close in time. Additionally, it's possible that rates will drop after you lock in yours, meaning you'll lose out on lower rates (or risk paying a fee to unlock and nab the lower rate).
When Is the Best Time to Lock In a Mortgage Rate?
While mortgage rates change constantly and are unpredictable, certain circumstances could make locking a good choice:
- When rates are on the rise: While mortgage rates fluctuate hourly or daily, they tend to move in an upward or downward trend over weeks or months. Start by researching recent mortgage rates. If they've been increasing, it could be smart to lock in now in case they rise further. Declining rates, on the other hand, could mean that locking in now causes you to miss out on an even lower rate later. Also, research to see if any events or market trends could be impacting rates now or have the potential to in the future; for example, rates were low during the height of the pandemic but are on the rise again at the time of writing.
- When the Fed is meeting: The Federal Reserve periodically meets and sometimes adjusts the federal funds rate, which is the rate at which financial institutions borrow money and therefore influences mortgage interest rates. Market interest rates have a tendency to increase after the Fed meets if they discuss rate increases, so it could help to research when they plan to meet and consider locking in a rate if your closing date occurs after a Fed meeting.
- When your budget is tight: By locking in a rate, you'll get a clearer sense of your monthly mortgage payment, which can give you a greater sense of financial certainty. If you don't lock in and rates skyrocket between your mortgage application and loan closing, your payments could be higher than expected and tougher on your budget.
- When closing is set: If your closing date seems set in stone and rates are competitive, locking in could be the right call. If you're not sure when you'll close, or it's possible there will be delays, locking may not be worth it since you'll likely have to pay a fee to extend it (or let it expire and pay current rates).
Can I Unlock a Mortgage Rate if Interest Rates Drop?
A mortgage rate lock could either help or hurt you since your rate stays frozen in place whether market rates rise or fall. A frozen rate protects you if rates climb, but it also means missing out on lower rates if they go down.
Some lenders offer a float-down option, which allows you to switch to the new, lower interest rate even if you've already locked in. But read the fine print first: You may pay extra for this option, and you may have to pay another fee if you opt to float down. It's important to do the math and ensure the potential rate savings is worth the cost of fees to lock and then float.
What Happens if My Rate Lock Expires?
When you lock in your mortgage rate, it's not indefinite—it can be anywhere from 15 to 60 days, sometimes longer. You should aim for a long enough period to cover the loan closing. If you think your lock-in period won't be long enough, ask your lender if you can switch to a longer one or extend your rate lock—just be aware that some lenders charge a fee for this.
If your rate lock expires and you don't extend it, you'll likely have to pay the mortgage rate that's current as of closing, which could be higher or lower than the locked rate. Keep in mind that if you do get stuck with a high rate and rates drop significantly in the future, there's always the possibility of refinancing.
Get Your Credit Mortgage-Ready
While market conditions play a huge role in mortgage interest rates, so does your credit score. The better your credit, the better chance you have of qualifying for a mortgage and landing lower interest rates. So before applying for a loan, take some time to get your credit mortgage-ready. You can monitor your credit for free through Experian to watch your progress and find ways to further improve your score.