Buying your first home is incredibly exciting! It can also be incredibly overwhelming as you navigate the home-buying process and learn the lingo of mortgages. “Locking in” is one of those concepts. Here’s what you need to know.
What is a rate lock?
Locking a rate means that you and the lender have made a commitment to your loan’s interest rate for an agreed-upon term, typically ranging from 14 to 90 days.
Do I really need to lock in my interest rate?
A lock enables you to purchase a home with confidence that your payments will be based on a guaranteed interest rate. Locking your rate can save you a significant amount of money over the course of your mortgage.1
- Show me the money!
Interest rates fluctuate and cannot be precisely predicted, which is why locking can be a wise strategy. A seemingly-small difference in interest rates can have a big impact on the total amount of interest you pay. Let’s look at an example:2
- With a $250,000 fixed-rate mortgage for 30 years at 3.75% interest, you would spend approximately $166,803.78 in total interest.
That same mortgage, at 3.25%, would cost you $141,684.74 in interest throughout the duration of the loan.
In our illustration, a 0.5% lower rate would save the borrower an estimated $25,119.04 over the course of 30 years!
What happens if mortgage rates go up?
No worries. You’re protected from an increase!
If rates drop, can I switch to the lower rate?
Once a rate has been locked, it can’t be changed … unless you included a “float down” feature.3
How does a float down lock work?
If interest rates drop significantly and certain parameters are met, a float down may reset your lock. Ask your Mortgage Loan Originator about feature details and fees. Float down option must be executed within 30 days of closing, but not less than 10 days before closing, to allow sufficient time for Final Loan Processing.
When should I lock?
There’s no magic formula. Most homebuyers lock a rate after their bid has been accepted by the seller, while others lock at the time of pre-approval. Decisions should be based on your purchase timeline rather than playing an interest rate guessing game.
How long does a lock remain in effect?
It varies among lenders. Stearns offers rate locks for 14, 21, 30, 45, 60 and 90 days, with longer options for construction loans.
What happens if my loan closes after my lock term?
Stearns has a free 7-day extension that may allow you to maintain your rate lock. We also offer a 30-day extension for an additional fee. We will discuss this, and missed deadlines, in a future post.
Are rate locks available for refinancing?
Absolutely! The rate lock length can be determined based on the estimated closing timeframe.
The Bottom Line
Even financial advisors who study markets every day can’t provide guaranteed rate projections. So rather than stress yourself trying to predict the perfect time to lock, turn to a trusted Mortgage Loan Originator who can provide guidance. Let’s lock and roll!
1 Interest rates remain historically low. Content provided in this blog post is for informational purposes only and does not make any implied or direct recommendations. There is no guarantee of future performance based on past market activity.
Mar 15, 2017
2 This example compares a fixed-rate mortgage for $250,000 for three years at 3.25% and 3.75%. This is being shown for illustrative purposes only and does not constitute a commitment to lend. Every borrower’s financial situation is unique and should be discussed with a qualified mortgage professional.
3 Ask your Mortgage Loan Originator about float down feature details, requirements and fees. It is not available for ARM or specialty mortgage products. Certain conditions apply and not all loans will qualify.