If you’re a first time home-buyer, you may have been given the option to lock in an interest rate before closing on your future home. But for many buyers, this can be a confusing choice, with its own set of pros and cons. Here are some of the most commonly asked questions about locking in mortgage rates, along with helpful and informative answers.
1. What are the advantages of locking in?
Mortgage rates change every day, and because the factors that influence them are complex, they can be especially difficult to predict—even for the experts. By locking in your interest rate (and points) for a specified length of time—often 30, 45, or 60 days—you’re able to protect yourself against the possibility of interest rates rising before you’re able to close on a home.
In the long run, this protection can make a big difference in your total interest paid. At typical home prices, a 0.5% difference in interest can mean tens (if not hundreds) of thousands of additional dollars spent on interest during the life of the loan.
2. What are the risks?
It’s also possible that mortgage rates may go down before you’ve closed on that new property, and if you haven’t discussed a plan for this scenario with your lender beforehand, you may end up losing out on potential savings.
Lenders will also generally charge a fee to lock in rates, which will usually vary based on the length of the lock-in. It’s up to you to determine whether the fee is worth the possible savings—although it often is. It’s also essential that you understand fully the details and terms of the agreement you’ve made with the lender. If possible, have a written agreement drafted and signed for your own protection.
3. What else do I need to know?
Understand that nobody knows for sure what tomorrow’s mortgage rates will look like. A good rule of thumb is to lock in you’re a rate once you feel comfortable with it, as long as you know you’ll be ready to close within the specified length of time. Because mortgage rates are unpredictable, locking in a rate you know you can pay eliminates some of the risk involved in borrowing. Once you’ve locked in, accept that you’ve made the best possible decision, and don’t stress about whether rates are moving up or down.