Locking In Your Interest Rate

You’re getting ready to buy a home. You feel like you’re losing your head keeping up with all of the minute details of financing the purchase of your dream home. You hear your friends talking about the great interest rates they got when they bought their home a year ago. “When you find a good rate, you’ve got to lock it in,” they tell you. That sounds simple enough, but what does “locking in your rate” even mean?

Defining the Interest Rate Lock

Locking in your interest rate means that your lender guarantees your interest rate for a given time period. Usually, lenders lock rates for 30, 45, or 60 days, but they can give you shorter or longer periods as well. For longer time frames, lenders will typically charge higher fees.

The rate lock hinges on several conditions as well. As long as you close within the agreed upon time and you do not make any changes to your application, your interest rate should be safe.

Timing is Everything

Interest rates are not seasonal. World events, such as the famous mortgage rate dip caused by Brexit, can affect mortgage rates in a massive way. The most recent rate hike, just this year, was caused by a jump in U.S. bond yields. Rates can even change over the course of an hour. This volatility can make landing your ideal rate challenging and complicated.  

No one can predict what happens to mortgage rates, but don’t let that discourage you. One of the most important factors in locking in your rate is your closing date. Try to balance your projected closing date with the quality of the offered rate. If you get an exceptional rate, but you close in two months, locking the rate in and paying a fee could work in your favor. As a rule of thumb, if the interest rate offered works for your situation, lock it in. As real estate writer Erik J. Martin puts it, “Although it can be smart to pay attention to events that can affect the interest rate market, seek advice from your chosen mortgage professional, deciding when to lock in your rate is ultimately up to you.” By locking in a rate that is good enough, you protect yourself from the risk of rates increasing.

However, rushing to lock your rate isn’t always the best decision. Pulling the trigger too early can lead to you missing out on savings if mortgage rates decrease. If you have enough time before you close, you may want to wait and see where the rates go. Just know that they might not go the way you want them to. While getting your lender to lock in your rate guarantees that you’ll close with the interest rate offered to you, there are no guarantees that the rate you got is the absolute best. Knowing this will empower you to watch the market and decisively lock in a rate that works for your situation. Remember, it’s all in the timing.