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One thing house hunting teaches you is that some things are out of your control. You can't control home prices, the amount of competition you'll have, or whether mortgage interest rates will change during your search. But actually, as a borrower, you do have the option to lock in a rate -- at a cost.
A mortgage rate lock (sometimes called rate protection) is a tool that allows you to "lock" an interest rate in place for a set period -- typically 15 to 60 days. If your loan closing is postponed for any reason, you can usually extend the lock period for a fee.
Say you lock in a mortgage interest rate of 4% for 30 days, and after 20 days, rates climb to 4.5%, guess what? You're still entitled to your 4% rate, which will make your mortgage far more affordable in the long run. As such, a mortgage rate lock protects you from rising interest rates.
Some mortgage lenders allow you to lock in rates as soon as your mortgage has been pre-approved, while others will not offer a mortgage lock until you present a purchase agreement to buy a home.
Unless rates are extraordinarily low, the best time to lock in a rate is after you've signed a purchase agreement, not the second your loan application is approved. That's because you want your lender to have more than enough time to process your loan before the rate lock period expires. Ask your lender how long it normally takes to get your home loan to closing and build in extra days for unforeseen circumstances -- that will help you determine how long a rate lock you need.
Many mortgage lenders do not charge for a mortgage rate lock or rate extension. Among those that do, you're typically looking at 0.25% to 0.50% of the total loan amount for a rate lock (of 60 days or less), and between 0.06% and 0.375% for an extension. That means if you borrow $300,000, it will cost between $750 and $1,500 for the initial lock, and $180 to $1,125 for an extension, payable at closing.
If you find a lender that offers everything you're looking for, do not let the fact that they charge for a mortgage rate lock discourage you as a borrower. Here's why: A mortgage rate lock can save you thousands of dollars over the life of a loan and quickly pay for itself. Plus, a mortgage lender that offers an automatic mortgage rate lock will often build that cost into the loan in a different way -- meaning, your initial rate or closing costs will be higher.
Let's say want to borrow $300,000 for 30 years and lock in a mortgage at 4% interest. Your monthly payment for principal and interest would be $1,432. Now, imagine that you did not lock in the interest rate early enough, and by the time you get to closing, the rate is 4.5%. That small difference means your principal and interest payments would be $1,520 per month instead, which is $88 more each month. By the time you pay the mortgage off in 30 years, you will have paid an extra $31,680.
Rate locks are popular with buyers for a reason. Here are a few advantages of locking your rate into place early as a borrower:
Rate locks can be helpful but are not perfect. Here are two of the reasons buyers think twice before locking in an interest rate:
When it's time to lock in your mortgage rate, figure out how long you're likely to need the lock in place. Then, oversee deadlines so that your lock does not expire before you close on your mortgage.
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
We've compiled a first-time home buying guides to help you confidently take the next step to land your best mortgage deal. Check out The Ascent's first-time home buyers guide for essential education.
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