When Should You Lock In Your Mortgage Rate?

A mortgage rate lock is an agreement between a borrower and a lender, securing a specific interest rate for a home loan over a defined period. It protects the borrower from potential interest rate increases while their mortgage application is processed. This provides certainty, allowing borrowers to budget for future housing payments without concern for market volatility.

How Mortgage Rates Change

Mortgage rates are influenced by a variety of economic factors, reflecting the broader financial landscape. The Federal Reserve’s policy decisions, particularly adjustments to its benchmark interest rate, the federal funds rate, influence short-term interest rates for banks. This can affect the rates offered on consumer loans, including mortgages.

Inflation is another primary driver of mortgage rate fluctuations. When inflation is high, the purchasing power of money diminishes, leading lenders to increase mortgage rates to compensate for the reduced value of future payments. Expectations of future inflation also cause bond investors to demand higher yields, which pushes mortgage rates upward.

Key economic data releases, such as employment figures and GDP growth, provide insights into the economy’s health. Strong economic indicators often result in upward pressure on mortgage rates. Conversely, signs of economic slowdown may cause rates to decline as lenders aim to stimulate borrowing.

The bond market, particularly the yield on the 10-year Treasury bond, has a strong correlation with fixed mortgage rates. Mortgage rates tend to follow the movement of this benchmark yield because it reflects the government’s borrowing cost for a decade, influencing other long-term assets. Lenders typically add a spread to the 10-year Treasury yield to determine mortgage rates, covering their operational costs, risks, and profit. Global economic or political events can also introduce market volatility, causing sudden shifts in investor sentiment and impacting mortgage rates.

Deciding When to Lock

The timing of a mortgage rate lock involves considering both prevailing market conditions and individual circumstances. In an environment where interest rates are trending upwards, locking in a rate earlier in the loan process is generally advisable. This proactive approach protects borrowers from potential rate hikes.

Conversely, if rates are on a downward trend, borrowers might consider waiting to lock or exploring options like a “float-down” provision. A float-down option, offered by some lenders, allows a borrower to secure a lower interest rate if market rates drop after their initial lock, typically for a fee. However, waiting too long carries the inherent risk that rates could reverse course and begin to rise again.

The estimated closing date of the loan is a significant factor in determining the appropriate lock period. Mortgage rate locks are commonly available for periods such as 30, 45, or 60 days, with some lenders offering longer terms like 90 or even 120 days. Longer lock periods may come with a slightly higher upfront cost or interest rate, as they involve greater risk for the lender. The typical mortgage loan process from application to closing can range from 30 to 60 days, though some loans may take up to 75 days.

Personal risk tolerance also plays a role in the decision. Some borrowers prioritize certainty and prefer to lock in a rate as soon as a favorable one is available, even if there’s a chance rates could drop further. Others might be willing to “float” their rate, accepting the risk of a potential increase in exchange for the possibility of securing a lower rate.

Lender policies and available options should be understood. While common lock periods exist, individual lenders may offer different lengths or pricing structures. Some lenders may charge a fee for locking a rate or for longer lock periods, which can range from a flat fee to a percentage of the loan amount, typically 0.25% to 1% for a float-down option.

Steps to Lock Your Rate

Once a borrower has assessed market conditions and their personal timeline, formally locking a mortgage rate begins with direct communication with their lender. The borrower must explicitly request a rate lock from their loan officer. This is not an automatic process; it requires a specific action on the borrower’s part.

The lender will require certain information to initiate the lock, including the loan type, loan amount, and property address. The lender should then provide a rate lock agreement or confirmation. This document is crucial as it details the secured interest rate, the duration of the lock period, and its expiration date.

Review the lock confirmation carefully to ensure all details are accurate, including any associated fees and whether a float-down option is included. The confirmation serves as a binding agreement, securing the rate as long as the loan closes within the specified timeframe and there are no significant changes to the application, such as a change in loan amount or credit score.

Throughout the lock period, maintaining communication with the lender is important to ensure loan processing remains on track for closing before the lock expires. Once a rate is locked, it remains secure even if market rates rise, unless a float-down option is exercised. If the loan does not close within the initial lock period, an extension may be necessary. Such extensions often incur additional fees, which vary by lender and can be a percentage of the loan amount, or the borrower may have to re-lock at the current market rates, potentially higher than the original locked rate.