To buy a house ? 3 reasons why you might want to lock in your mortgage rate

Image source: Getty Images

It’s a simple math: the lower your interest rate, the less interest you’ll pay over the life of your mortgage. That’s more money to spend on things like saving and investing for the future. If you’re in the process of buying a home, knowing how to lock in your interest rate is essential. Here we’ll cover a mortgage rate lock, how much it costs, and three reasons why you might want to consider locking your rate.

READ MORE: How to buy a house

What is a Mortgage Rate Lock?

Typically, you apply for a mortgage and, if your loan application is approved, you are offered a specific interest rate. Let’s say it takes 60 days from when you make an offer on the house to when you close. If the interest rate increases before the close, the rate originally offered to you disappears and you are locked in with the new higher rate. You get the latest lower rate if the mortgage rate drops.

Locking in your rate lets you know for sure how much you’ll pay, so you don’t have to think about what will happen if the rate goes up before the close. Lenders allow you to lock in a rate at any time, up to five days before the scheduled closing.

Here are three reasons why you might want to consider a rate lock:

1. Prices are on the rise

Many factors, including the US economy, mortgage demand and geopolitical unrest, determine whether interest rates rise or fall. Because the US economy is on the right track, interest rates are rising. Simply put, the Federal Reserve isn’t as worried about the economy as it was a few months ago and feels safe raising its federal funds rate (the rate at which banks lend to each other). money between them and the basis of consumer interest rates).

All this to say that there is little reason to believe that interest rates will fall over the next few months. If they don’t go down, chances are they will go up. Locking in your rate now means you’ll end up with a lower interest rate than you would have if you let it go up until the close.

Most rate locks last 15 to 60 days, depending on your lender. If you really want to lock in a rate, check these four things before choosing a lender:

  1. How long the rate lock lasts
  2. Your expected closing date
  3. If the blocking of the tariff is free
  4. If you have the option to extend the lockout period

2. You can create a reality-based budget

Let’s say you put 20% down on a $300,000 home. Initially, you are offered an APR of 3.25%. Your payment (principal and interest only) is $1,045 per month. You decide not to lock in the rate, and by the time you close the property, the APR is 4.25%, and your new principal and interest payment is $1,181 per month. That’s only $136 more each month, but over the life of a 30-year mortgage, you’ll be paying $49,000 in extra interest, just because you’re locked into a one-point-higher interest rate. percentage.

Now imagine you created a budget based on the lower interest rate and ended up paying more because the APR jumped. Not only would you need to rework your budget, but if you’re a long-term planner, you’d also need to rework how much you can expect to have in retirement.

3. You can’t afford a higher rate

Due to low inventory, housing prices are historically high. If a rise in mortgage rates made it harder for you to qualify for the mortgage, locking in a lower rate now is a good idea.

Even if a lender tells you you’re entitled to a lot more than you asked for, you know how much wiggle room you want in your monthly budget. Reducing your finances, even if recommended by a banker or real estate agent, is a recipe for financial anxiety. Why take away the fun of buying a new home by introducing financial discomfort?

Float option

Some lenders offer a floating option, a feature that lets you get a lower interest rate if rates drop after you’ve already locked in your mortgage rate. Most lenders will charge you for this option, and some charge up to 1% of the purchase price. On a $300,000 mortgage, that can go up to $3,000.

If the interest rate drops before the close, you may be able to take advantage of the lower rate. This is because each lender has their own set of rules. For example, some lenders may say that rates should drop between 0.25% and 1%. If the rate only drops by 0.20%, you will not be able to use the option. Also, you must have the lender’s approval before activating the floating option.

Before you spend money on a floating option, ask a lender these four questions:

  1. How much does the rate have to drop before I can take advantage of the floating option?
  2. How much are the floating fees?
  3. When does the floating option expire?
  4. Under what conditions does the lender not approve the use of the floating option?

Mortgage Rate Lock Cost

Many mortgage lenders charge nothing for a mortgage rate lock and even allow free extensions. Among mortgage lenders that charge fees, you’ll typically pay between 0.25% and 0.50% of the total loan amount, payable at closing. This premium lock will last 60 days or less, and if you need an extension, it will cost you between 0.06% and 0.375% more. So if you borrow $300,000, you can expect to pay between $750 and $1,500 for the first lock and $180 to $1,125 for an extension.

Again, if you want a free rate lock-in and extension, make sure it’s something a mortgage lender offers before you borrow. If there’s a charge for a rate lock, measure that cost against the amount you’re likely to save in interest over the term of the mortgage.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Our expert recommends this company for finding a low rate – and in fact he’s used them himself for refi (twice!).

Read our free review

We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Comments are closed.