Locking your interest rate can play a big role in how much you pay for your mortgage over the next 15 or 30 years. That’s why it’s important to understand exactly what a rate lock is and how it works.
For the most part, getting a rate lock can work to your advantage, but you may also encounter some problems if you lock your rate at the wrong time or if you don’t have flexibility built into your lock. Here’s a look at the pros and cons of locking your mortgage rate, including reasons why you might want to develop a rate-lock strategy rather than locking as soon as you apply for your mortgage.
Pro: You Can Avoid Paying a Higher Rate
The biggest advantage of a mortgage rate lock is that it can prevent you from having to pay a higher rate down the road. In a rising-rate environment — such as in the first quarter of 2022 — locking a rate as soon as possible is generally a good strategy.
Most rate locks run for 30 to 45 days, and that amounts to an eternity in the interest-rate market. After 45 days, your rate might be as much as 0.25% or more higher, especially with the Fed determined to aggressively raise interest rates in 2022. Locking in your rate right away can protect you from these rate hikes.
Con: You Might Have To Pay if Your Rate Goes Down
Although rates seem destined to march higher in 2022, it’s far from a certainty. In a more normal market environment, rates may be as likely to trend down as to go higher. If you lock your rate during a falling-rate environment, you might be out of luck.
Some rate locks allow for a repricing if rates fall by 0.25% or more, but others require you to pay for that privilege. Check out the fine print of your rate lock with your lender before you commit yourself to what may end up being a higher rate than you need to pay.
Pro: You Can Usually Lock Your Rate Free of Charge for 30 Days
Most lenders will allow you to lock your rate for at least 30 days for free. If that’s the case in your scenario, then there’s almost no reason not to lock your rate right away. Think of it as a type of insurance policy. If rates go higher, you’re locked into your lower rate, but if they drop, you may be able to reprice your loan at the lower rate.
Con: If You Lock Your Rate Too Early, You Might Have To Pay To Extend It
The one caveat with locking in a mortgage as soon as possible, even if you have the freedom to reprice it lower, is that you might have to pay to extend your lock. Imagine that your free rate lock only extends for 30 days, which is often the case. If you’re just starting to look for a home, it can be hard-to-impossible to find the right house, get your financing and close the deal in just 30 days.
If you have to extend your rate lock — if you’re even allowed to do so by your lender — you’ll typically have to pay a 0.25% penalty every 14 days that you want to extend the lock. On a $400,000 home purchase, that could amount to an additional $1,000 in fees just to extend your rate lock every two weeks. Generally speaking, it’s advisable to find a property you like before you apply for your rate lock to help avoid this situation. Finding a lender that offers a 45-day free period for the rate lock is another good strategy.
Pro: If You Find a Good Rate, You Have One Less Thing To Worry About
Buying a house can be a very stressful experience. Finding a good interest rate and locking it down early in the process takes one very big piece of the puzzle off your plate. If you know that you have a rate below 4% in the current environment, for example, you can feel confident that you have a great rate for the next 30 years. Snagging a low rate when it’s dangled in front of you allows you to focus on finding the right home at the right price.
Con: You May Feel Pressured To Buy a House
Once you lock your interest rate, the clock starts ticking. Although a 45-day rate lock usually allows you enough time to close on a house, some buyers are sensitive to that time pressure. A 30-day rate lock only amps up the stress. Even if you think you’ve found a good mortgage rate, waiting to lock that rate in until you know you’ll be able to close your deal in time can give you added peace of mind during a stressful experience.
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