You think you did all of the hard work – you’ve found a home and you’ve even secured financing. But you still have one more big decision to make – when should you lock the interest rate? This isn’t a decision that you should take lightly. There are many factors that go into it.
Understanding a Locked Interest Rate
When you lock your interest rate, that’s your rate for your loan; it doesn’t matter what happens to rates moving forward. Even if you haven’t closed on your loan yet, you are still stuck with the rate you locked. There are a few exceptions to this rule though:
- If the rate lock expires, you could be subjected to the current market rates if they are worse than the rate that you locked.
- You may ask for a float down if rates get better. Certain lenders offer the opportunity for you to choose the lower rate for a fee once you lock your interest rate, but not all lenders offer this.
Typically, you’ll have the locked rate for 10 – 60 days, but some lenders offer longer lock periods. Typically, the longer you lock an interest rate, the more it costs you either in fees or with a higher interest rate.
Choosing the Right Time
Now it’s time to choose the right time to lock your interest rate. Is it right after you sign a contract? Is it right before you close? When should you lock it?
- You must have a purchase contract – Almost all lenders require that you have a signed and executed purchase contract before you can lock your interest rate. If you lock a rate before then and you don’t end up getting the home, your lock will likely expire.
- Watch the rates – Once you have a contract, you want to watch the rates. You should have a rate in mind that will make you feel comfortable. If rates hit that point, you probably want to lock it unless you are a long time out from closing. You can’t predict what rates will do the next day, so giving up that chance could be quite the gamble.
- Watch your closing date – Some contracts have a closing date that is somewhat far away. If that’s the case, don’t lock your rate in too early. You have a long time ahead of you for rates to change. Plus, the longer your lock period is, the more the rate will cost you because it costs lenders for you to lock in a rate for much more than 30 days.
- You must lock before you close – No matter how nervous you are or how reluctant you are to lock yourself into an interest rate, you have to lock it before you can close. Your lender cannot process your loan and create the closing documents until you choose a rate and lock it in for your loan.
What if a Lock Expires?
Everyone worries about this scenario. What happens if a lock expires on you? You’ll have a few options:
- Extend the lock – Some lenders allow you to pay a small fee to extend the lock. You should usually do this before the rate lock expires, though. Choosing to do it when you are near the date of the extension, but not past it is the best choice; you should ask your lender what the cost is, though, as it can vary by lender.
- Take the current rate – Some lenders force you to take the current rate if they are higher than what you locked. You’ll have to decide at that point what you want to do. If the rates are really bad, you may want to find another lender, but that is only possible if you have time before the closing to do so.
The best thing you can do is stay in contact with your lender. They have the best idea of what will happen to interest rates. While they can’t predict what will happen, they have been around and seen what they do historically. Once you lock a rate, stay in closer contact with your lender. Ask about the status of your loan and your options if you get close to the expiration date and are worried about losing your rate.