Locking in a mortgage rate is a strategic move that can secure a set interest rate for a specific period—helping to protect you from potential rate hikes before closing. But locking in has its complexities. Let’s break down what rate locks are, how they work, why trying to “game” the market isn’t always the best idea.
Why locking in a mortgage rate matters
Mortgage rates change daily based on factors like the bond market, Federal Reserve decisions, and broader economic conditions. Locking your rate means you’re protected if rates rise before you close.
Say you’re offered a 6% interest rate on a $300,000 loan. Without a rate lock, a jump to 6.5% could increase your monthly payment from $1,799 to $1,896—an extra $97 per month. Over the first 10 years of your mortgage, that adds up to $11,640 in additional payments.
A float-down policy can be a life saver
Now, a lock protects you if rates go up—but what if rates drop? To protect buyers from these sudden moves it’s important to work with a lender (ahem, Tomo Mortgage) that offers a “float down” policy. That means that if you lock, and the rates drop by 0.25 basis points or so, you’ll get a better rate anyway. That way you don’t have to stress about the little ups and downs in the market all day, every day.
How a mortgage rate lock works: how long to lock
A rate lock usually lasts 30 to 60 days to cover the time needed to close the loan. Some lenders offer longer lock periods, but this often comes at an extra cost. And, honestly, a super long lock period only makes sense if you’re not moving for a long while and there’s a historically low interest rate at the moment that you don’t want to slip away.
For example, imagine a lender provides a standard 45-day lock at no extra charge. However, if you need a 90-day lock for a new construction property, they might charge you an additional 0.25% of the loan amount, or $750 on a $300,000 loan.
Locking vs. lock extension fees
If your lock expires before closing, you might need to extend it. Extension fees can vary, typically around 0.125%–0.375% of the loan amount per day. If you’re extending a $300,000 loan lock for 10 days at a 0.125% fee, that’s an extra $375. Make sure to stay on top of your timeline to avoid these costs.
Are lock fees lender-specific or market-driven?
Lock fees are primarily lender-specific. Each lender determines their own fees based on their policies, risk tolerance, and competitive positioning. Some may include a basic 30- or 45-day lock with no additional cost, while others charge for even short-term locks.
Lock fees can also vary based on factors like loan type, size, and borrower credit profile. Borrowers should ask about lock fees when comparing lenders, as they’re not always upfront or standardized.
Now, while fees are lender-specific, broader market conditions do influence how lenders approach rate locks. During times of volatility, lenders may increase lock fees to cover the risk of rate changes during the lock period. In a rising rate environment, lenders may raise lock fees or charge more for extended periods.
Trying to time the market? Why it’s often better to lock
It’s tempting to “time” your rate lock to get the lowest possible rate. But mortgage rates fluctuate daily (often multiple times a day, in fact), and waiting too long can backfire.
You might see news that the Fed is going to cut interest rates, for example. You might think—if everyone says the Fed is going to cut rates in a week, I should wait until they make that decision and get a lower rate. The problem is that banks will respond to this same news too, and they might preemptively lower rates (expecting it to drop), and they might over-correct for anticipated cuts down the road. If the Fed cuts rates, but they cut a little less than they expected, rates might actually go up after the Fed decision.
Now, if you’re trying to play the market, you might be out of luck. If you lock in with a float-down policy, you’re covered either way.
What if you want to switch lenders after locking a rate?
You can learn more about the benefits of rate shopping here, but once you lock a rate with a lender, you’re locked in for that period. If you want to switch lenders or go with a different rate, you’ll need to let your original rate lock expire or terminate the application with the first lender.
Common pitfalls and what to watch out for
- Not locking in time. Waiting too long can mean missing a favorable rate. Coordinate with your lender to lock at an optimal time, given your closing schedule and current market conditions.
- Overpaying for extensions. If your lock expires before closing, extension fees can add up quickly. Plan your timeline carefully to avoid these costs.
- Understand the float-down policy. Lenders develop policies that try to account for the constant ups and downs in interest rates (they make less money if the rate you locked is lower than the rates at closing). So, a float-down policy might only kick-in at a specific change in rate (like, only if the rates drop less than 0.25 basis points). Or they might record that change at a specific time (e.g., only one day a week vs the lowest point during that week). It’s important to understand these rules, and chat with your Loan Advisor about all the nitty gritty, so there’s no surprises.
Final thoughts: should you lock your rate?
Locking your mortgage rate provides security and stability in a volatile market. With recent rate fluctuations, locking when you find a rate close to recent averages can help you avoid future hikes. By understanding your lender’s lock fees, extension policies, and options like float-downs, you can make an informed decision.
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