You got pre-approved for a loan and found the perfect house. The next step is figuring out when to lock in your interest rate. Should you do it the minute you find a house? Should you lock it in before you even find a house? What happens if rates increase? We answer these questions and more below.
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What Does it Mean to Lock in Your Interest Rate?
When you lock in an interest rate, you are stuck with this rate for your loan. Whether rates go up or down after you secure your rate, it doesn’t matter. The rate you took is yours to keep unless it expires. You lock your rate for a specified period. They usually range between 10 and 60-day locks. The longer you lock your rate, the more it costs.
When we talk about locking rate costing money, it is in terms of the interest rate. The longer you ask to lock a rate, the higher the rate will be. We aren’t talking big numbers here, but lenders usually 0.125 to 0.25% more for longer periods. This is strictly, because it costs the lender more harm to promise you a rate for an extended period. If rates increase dramatically, the lender must give you the rate promised, which is why they charge a higher rate.
Locking Your Interest Rate
The bigger question is when should you lock your rate? There’s nothing worse than choosing a rate, only to find out that they dropped one day later. Unfortunately, there is no foolproof way to determine what rates will do. What you can do, however, is time your lock at the best time for you.
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Typically, lenders don’t encourage borrowers to lock in a rate until they have an executed purchase contract. This means the seller agreed to your offer and accepts it. They also accept any provisions you ask for during the negotiation process. If you lock the rate prior to having an executed sales contract, the rate could expire before you close on the home. Having an executed contract also gives you a closing date, which allows you to know how long you must lock the rate.
Don’t think you have to lock in a rate as soon as you sign a purchase contract, though. You have the option to wait. In fact, you can wait until a few days before you close if you really want to. If you are the gambling type, you can wait until the rates get as low as you want and then lock it in. If that doesn’t happen, though, you’ll be stuck with whatever rate is available at the time because you have to choose a rate before you can close on the loan.
Dealing With an Expired Lock
The real problem occurs if your rate lock expires. It happens. There are delays in closing so you lose your rate. Sometimes there are issues with the seller that hold up the process. Whatever the case may be, if you go past the expiration date, you have one of two choices:
- Ask the lender for an extension – Some lenders provide an extension on the rate lock. The extension will cost you in the form of points. Ask the lender how much it would cost you and determine if it is worth it.
- Pay the market rate – If you can’t get an extension, you are stuck with whatever the market rate is at the time. Sometimes borrowers get lucky and the rates are the same or lower. But, they could be higher. It’s a chance you have to take.
Talk to your lender about locking in your interest rate. They will help you determine the perfect time to do so. They’ll also let you know how much it will cost. You should decide for yourself when you think is the best time. Consider your desire for a specific rate and how much chance you are willing to take. Then consider the market conditions and what they are predicted to do. This will help you choose the right lock period for yourself.