(StatePoint) When it comes to home loans, interest rates matter – a lot. Differences as small as one-quarter of a percentage point can save you thousands of dollars over the life of a home loan.
One thing to keep in mind as you move through the mortgage process is that your interest rate isn’t guaranteed until it’s locked in. A rate lock can help you stay on budget and protect you from rising rates before closing.
What is a Rate Lock and Why is it Important? A rate lock is an agreement between you and your lender. It guarantees that the interest rate you are offered won’t change for a set amount of time — even if rates go up before you close. A rate lock means you don’t have to worry about the ups and downs of the market while you wait for your loan to close. Knowing your interest rate ahead of time can also help you set a monthly budget. Without a rate lock, rising rates could push your payment higher, which could make your new home harder to afford.
When Should You Consider Locking Your Rate? The right time to lock in your rate depends on the current market, how close you are to closing and how comfortable you are with risk. If rates are lower and you’re happy with your loan type and monthly payment, it may be smart to lock it in. Your lender is your best guide. They can help you decide when to lock your rate and how long to keep it locked.
What You Should Know Before Locking Your Rate. Rate locks are only good for a set period. Standard locks are offered for 30, 45, 60 or 90 days. You’ll need to close your loan before the lock expires or you might lose the rate.
Some lenders may charge a small fee for rate locks, while others may include it under covered costs. Usually, a longer lock period will have a higher fee. Ask your lender if there’s a cost and whether it’s refundable.
If interest rates drop after you’ve locked, you usually stay locked in at the higher rate. Some lenders may offer a “float-down” option, which lets you take advantage of a lower rate if one becomes available. Terms and availability of float-down options vary, so ask your lender what they offer.
Rate locks do offer some flexibility. If you find a more attractive rate from a different lender, you are not obligated to keep your rate lock. If you choose to work with a different lender, any rate lock fees paid should be reimbursed.
Always get your rate lock agreement in writing. It should clearly state the interest rate, the type of loan, the length of the lock and any associated fees.
A rate lock can be a smart move, giving you more control, stability and peace of mind during what can be a stressful time. Just be sure to talk to your lender early in the process to learn your options. A little preparation can go a long way toward easing your homeownership journey.
