When to Lock in Your Mortgage Rate

Tamsen Butler
Pencil erasing or reducing mortgage interest rate

Mortgage applicants might find themselves frustrated when their lender won't give solid advice as to when exactly to lock in a mortgage rate, but the lender's apprehension is for good reason. There is no guarantee as to what the "lowest mortgage rate" is, and lenders certainly don't want to give a best guess that might make them look wrong when rates drop after a lock.

Timing the Lock

Locking a mortgage rate means the applicant is guaranteed the interest rate at the time of the lock, which works well if the lock occurs when interest rates are low. The length of a mortgage rate lock varies from lender to lender, with some allowing extended locks for an additional fee. That's why it's important to know how long your lender will allow for a lock; you don't want your lock to expire prior to closing.

  • The lock should be done when interest rates are low and the closing will occur before the rate lock expiration. This usually happens after the buyer has selected a home for purchase and the mortgage loan is approved; rate locks aren't typical in prequalifications.
  • Requesting a rate lock extension is possible, but it may result in a higher-than-the-offered rate. There may be some negotiating taking place in order to get the lock extended, particularly if the lender typically doesn't allow extensions.

Gambling on Interest Rates

Even a small percentage change can have a huge impact on how much money a borrower pays throughout the life of a mortgage. It comes as no surprise savvy borrowers want the very lowest interest rate possible and therefore want to lock in when the rate is at its lowest.

Knowing When Rates Are at Their Lowest

The issue is that nobody - including the lender - really knows when rates are at their lowest. They can guess, and they can reference historical interest rate data to assert the attractiveness of a particular rate, but they can't know with absolute certainty that interest rates won't drop again. While mortgage interest rates are usually closely tied to the various indexes used by financial institutions, there is no guarantee that mortgage rates will follow any index.

Unlocking the Rate

Before locking, find out what happens if rates drop before the lock expires. While some lenders will give borrowers the prevailing interest rate if it's lower, others will abide by the lock or charge a fee to unlock the rate.

Getting the Best Rate

Before locking in an interest rate, you should already have figured out how much you can comfortably afford for a monthly mortgage payment. When interest rates match where you need them to be to secure the monthly payment you desire, it's time to lock in the rate - this is assuming, of course, the timeframe for the lock will work with your presumed closing date.

Be sure to understand the terms of the lock with your lender fully before locking - there may be fees and restrictions that make it less-than desirable.

Locking an Existing ARM

Adjustable rate mortgages (ARM) feature varying interest rates. ARMS with conversion options allow borrowers to lock in an interest rate to an existing ARM without a full refinance. There may be fees attached to utilizing the conversion option, so be sure to understand the associated fees before converting.

Best Time to Convert

Restrictions may also apply regarding when the conversion can take place and will limit the number of times a rate lock can occur. Based on this information and the desired monthly mortgage payment, exercise the conversion option when it will be to your financial advantage, particularly when the adjustable rate has the potential to cause financial stress if rates go higher; for some ARM borrowers, the possibility of a rate increase causes extra stress. If converting the loan will help relieve some of that stress, it's worth it.

Interest Rate Importance

The interest rate of a mortgage will have a big impact on how much money is spent over the life of the loan - much more so than the closing costs. For this reason, it's indeed important to get the lowest rate possible, but there is no magic formula to tell you when to lock in an interest rate.

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When to Lock in Your Mortgage Rate