The Ultimate Guide to Rate Locks

When mortgage rates suddenly dipped to long-awaited lows earlier this year, rate locks became more popular than ever, giving buyers peace of mind that those low rates would be honored — even if it took weeks (or sometimes months) to find that perfect home, finalize their loan application, and close on the mortgage.

But rate locks aren’t for everyone — nor are they the same at every lender. Are you considering one 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 of the loan total up to about half of a percent. 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 (if you qualify for one) 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.

They 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. Not all offer this option, though.

The other con is that, in certain cases, it comes 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, doing a 90-day rate lock a few months out can be wise, 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 of delays or unexpected hiccups. You can also talk to your loan officer about your home buying goals and estimated timeline. They can point you toward the best rate lock option for your scenario.

A quick 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, though, yours will go down, too. 

If you’re currently on the home hunt and want to take advantage of today’s low rates, LOCK & SHOP gives you 90 days to shop, make an offer, and close on your loan. Need more time? Purchasing a new construction property, short sale, or foreclosure? Need to sell your old house first? Our 270-day Extended Rate Lock can help. Contact your local loan officer to learn more today.