The Ultimate Guide to Rate Locks

When applying for a mortgage to buy a home, the interest rate you secure can make a big difference. Obviously, the lower the rate, the better. It means you’ll have lower monthly payments and pay less over the life of the loan.

A mortgage rate lock allows you to capture a specific interest rate for a set period while your home loan is processed. This can provide significant financial and emotional benefits, but the timing of when to lock your rate is crucial.

Are you considering a rate lock for your upcoming home purchase? Learn more below.

What Is a Rate Lock?

A rate lock is exactly what it sounds like — a way of “locking in” the interest rate that you initially qualify for with your lender. They come with set terms: 30-day, 60-day, 90-day, or more. That means your rate is guaranteed for that amount of time — as long as you close on your loan before the time is up.

Some lenders charge fees that may vary anywhere from .25 percent to .5 percent of the loan total. Generally, the longer a lock’s term is, the higher its fee will be.

The Pros and Cons of Rate Locks

The biggest benefit of a rate lock is that it allows you to keep your low mortgage rate, even if market rates start to rise. This can mean lower monthly payments and less interest paid over time — not to mention serious peace of mind for a budget-minded borrower.

A rate lock can also help you accurately estimate your potential monthly payment early on — so you can budget, save, and properly prepare your finances for homeownership ahead of time.

The downside is that rates don’t always rise. If you’re locked into a 4.5 percent rate, for example, and market rates drop to 4.25 percent, you’re sometimes still locked into that higher rate. That means you’ll have a higher monthly payment and will pay more in interest for the remainder of your loan. In some cases, a rate lock may come with a “float-down” option, which allows you to take advantage of lower market rates for a fee.

The other con is, as we mentioned, some rate locks come with a fee. This can make the up-front costs of buying a home more expensive.

How Soon Is too Soon?

Obviously, if you qualify for a great rate, your inclination is to lock it in and prevent any rate hikes from cramping your affordability. But remember, rate locks only last for a certain amount of time. If you lock your rate for 30 days, but you haven’t even found a house yet, you’re probably not going to close in that 30-day period. You might have to pay extra fees to extend that as-promised rate, or it could mean re-doing your entire mortgage application, getting a new rate, and starting all over from scratch entirely.

Ultimately, the best time depends on your unique buying situation, as well as the different options your lender offers. If you’ve already found a home and your offer has been accepted, a 30-day lock is a good option. If you’re still shopping around but know you’ll be buying soon, a 90-day rate lock might be a wise move, especially if experts are predicting a rise in mortgage rates.

Ask your lender about the various options they offer, as well as their average closing times. If their average time to close is 31 days, a 30-day lock wouldn’t be a smart move. Make sure to choose a rate lock that covers your closing period — and add in a little cushion, in case there’s a delay or unexpected hiccup.

An important note: Rate locks are only valid if nothing changes in your income, credit, or employment profile during the lock period. If you lose your job, take out a new car loan, or your credit score changes, your lender will need to re-process your file and give you a new rate — regardless of any lock you have in place.

Embrace Rate Lock Options

At Embrace Home Loans, we offer a variety of rate lock options. If rates go up, your locked-in rate stays the same. If rates go down, yours will go down, too.

If you’re currently on the home hunt and want to take advantage of a low rate, our 270-day Extended Rate Lock can help. Contact your local loan officer to learn more today.