When is the Best Time to Lock Your Mortgage Rate?

Stacked locks on a fence

Whether you’re buying a home or refinancing an existing mortgage, there comes a time when you have to decide on a mortgage rate. No, you don’t get to pick the rate you want to pay, but you do have the opportunity to choose when to lock it.

To experience the most savings, pay attention to current mortgage rates and where they are heading. And, don’t forget to ask yourself the following questions before making a decision.

What is a mortgage rate lock?

A mortgage rate lock sets your interest rate until closing, as long as there are no changes made to your application.  Application changes can include a new loan program, a difference in your down payment amount, credit score changes, or even an appraisal that comes in higher or lower than expected. If any of these changes happen, your rate lock could be affected.

Most lenders will commit — in writing — to a mortgage rate for a specific time period. That’s because Regulation Z requires mortgage issuers, credit card companies, and other lenders to provide written disclosure of important credit terms, such as interest rate and other financing charges. In this case, it requires a lender to notify a borrower within three business days of locking the interest rate.  Some states have a formal Lock-In Agreement, but most don't since the Loan Estimate already lists all applicable expenses.  

How long can you lock in a mortgage rate?

Lock periods are typically for 30, 45, or 60 days, and sometimes longer. Most mortgage applications are completed within 60 days, so these lock periods are usually sufficient for borrowers. Though it’s not mandatory to lock your rate, it’s important to remember that interest rates can fluctuate. So, it’s in your best interest to keep your eye on them as you move through the mortgage process.

How often do interest rates change?

Mortgage rates can change daily, sometimes multiple times a day.  They’re difficult to predict, though they’re often influenced by economic changes, world events, and the Federal Reserve (also known as the Fed in the media). While the Federal Reserve does not set the specific interest rates in the mortgage market, its actions in establishing the Fed Funds rate significantly influence them.

The bottom line: bad news and uncertainty are generally good for mortgage interest rates. Investors tend to flock to bonds in bad times, and more demand pushes interest rates lower.

Is there a right time to lock your rate?

That’s debatable. Some say to lock an interest rate after you’ve made an offer on a home. Others argue to lock an interest rate during the mortgage approval process, so you have a clear idea of your new mortgage payment by the time you get to closing. It’s all a matter of personal preference. Are you a gambler or would you rather get it done and over with?

No matter your answer, it’s important to understand the significance a rate change can have on your mortgage.

Say you’re purchasing a $400,000 home.

  • If you’re fortunate to have an interest rate of 4.5% rate on a 30-year loan, then you’re looking at $7,480 in interest payments your first year.

  • If you think 4.5% is high and you wait it out to see if it drops, but it actually rises to 4.75% when you need to lock — then you’ve just added another $417 in interest for your first year.

  • Now that amount may not break the bank, but it adds up over the life of your loan, considering you’d pay $308,360 (at 4.25% interest rate) in interest over the life of your loan vs. $329,627 (with a 4.5% interest rate). Data was taken from our mortgage amortization calculator.

Does it cost money to lock your rate?

A 30-day rate lock is usually free, but anything longer may incur a mortgage rate lock extension fee or a higher interest rate. Be sure to ask your lender what they charge. At American Financing, you can lock your rate up to 90 days at no charge.

What is the float down option?

Some lenders offer a mortgage rate lock float down, which enables borrowers a one-time opportunity to exchange their current rate for a lower rate, assuming rates have fallen. Think of it as an enhancement to the rate lock, because it’s only available after you lock your rate. If you have time before you close on your home and think that there’s a chance interest rates can get better, then locking your rate now (just in case rates don’t get better) and choosing a float down option may be for you. Just keep in mind there are additional costs when it comes to the float down option. Be sure to have your lender quote their fees to you.

Key Takeaways

There are many things to consider when it comes to purchasing a home or refinancing an existing mortgage. A general understanding of what influences mortgage rates can help you make a financially sound decision. But keep in mind, circumstances and benefits differ based on your personal financial situation. So, it’s always in your best interest to work with a lender who employs salary-based mortgage consultants and  — better yet — no upfront fees.

When you’re ready to walk through options and receive a custom home loan program, give us a call at (800) 910-4055.