Should I Lock in My Interest Rate?

A rate lock means that a borrower can freeze the interest rate on a mortgage for a certain period of time, ideally until closing. The lender promises that the mortgage rate offered to a borrower will remain fixed, saving the borrower from the worry of rates going up. In exchange for this commitment, the borrower may need to pay a fee to the lender. This mechanism could essentially determine whether you will be able to afford that loan once you decide on a mortgage. However, a locked-in rate could also prevent you from benefiting from a decrease in interest rates.

Borrowers can usually only choose to lock in a rate after the loan application is approved. Generally, they will not lock in an interest rate until making the decision on a house to buy. Before deciding on a house, it is difficult for a borrower to know how long it will take to find a property and have a purchase offer accepted. In the event that the house shopping takes a long time and a rate is locked in too early, borrowers may miss the chance for an even lower rate or may have to pay extra fees to extend the lock period after its expiration. Typical lock periods range from 30–60 days.

Whether you should lock in your interest rate depends on your prediction about the mortgage market. If you expect that mortgage rates will rise, or even that rates will stay about the same, locking in the interest rate will help protect you from any possible rate increase. Note that even a small price increase can lead to a difference of hundreds or thousands of dollars in interest payments each year. Therefore, if you feel like you have secured a decent interest rate, it may be a good idea to lock it in.

In the event that mortgage rates decrease during your lock period, you will unfortunately miss out on the lower rate. However, some lenders also offer a float down option to accompany the mortgage rate lock. A float down is essentially an option that you may exercise one time to benefit from a currently available lower interest rate, and can help protect you from missing out on a rate decrease when you lock in your rates.

Tellus TIP:

It is difficult to predict mortgage interest rates, which fluctuate up and down on a daily basis. Even experienced economists may get their interest rate predictions wrong. Get the best rate you can and lock it in.