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The best time to lock a mortgage rate

Whether you're getting ready to buy your first home or you've done this before, you'll benefit from discovering the best time to lock in a mortgage rate. Understanding how it works and what it's for can help make the homebuying process a little easier.

When paying off a mortgage, buyers need to pay interest on the money borrowed. The money that you borrow initially is called the principal, and the interest gets charged as a percentage of that principal.

The interest rate for your mortgage will ultimately determine how much interest you'll pay over the life of the loan. Therefore, the lower the mortgage interest rate is, the better.

What is a mortgage rate lock?

Locking in or agreeing to the interest rate for your mortgage is known as a mortgage rate lock. Whether you lock in your interest rate early on, or closer to closing, it has to be agreed upon before the mortgage can be finalized.

Lenders offer this locking service to borrowers because interest rates often fluctuate while your home loan application is being finalized. The purpose of the mortgage rate lock is to secure the loan at a specific interest rate and avoid changes before you close.

Various factors influence interest rate changes, such as the stock market, the Federal Reserve, inflation, worldwide events and politics. Interest rate changes may happen during the mortgage application process. If interest rates go up after you’ve locked yours in, you won’t be impacted by the increase.

How does a mortgage rate lock work?

When you lock in your interest rate, it will stay the same for an agreed-upon amount of time, usually between 30 and 90 days. This means you won't need to worry about rates going up before your loan closes. This could save you a substantial amount of money if interest rates hike during the mortgage approval process.

When can I lock in a mortgage interest rate?

You can choose to lock in your mortgage rate from the moment you select a mortgage, up to five days before closing. Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won't affect you.

The ideal time to lock your mortgage rate is when interest rates are at their lowest, but this is hard to predict — even for the experts.

It's worth noting that interest rates could decrease during your lock period. Should this happen, you'll most likely have to pay the rate you initially locked in. If your lock period has lapsed before the closing, you may be able to negotiate with your lender for a new rate lock, but it'll depend on the circumstances and the lender.

What is a float-down option?

A float-down is an additional option you can take out with your lender. This option means you'll lock in at the agreed upon rate, but should interest rates drop within the period, you'll be closing at the lower rate.

Both lender and borrower will have to agree to the terms of the float-down option, including how long it will last and how much the interest rates have to drop to be enforced. Float down options do cost more than locking your mortgage rate. That cost is often dependent on how long the option lasts.

Mortgage lock fees

A mortgage lock can carry a fee. The cost will depend on the length of the lock period, and will vary by lender. Some lenders offer short-term mortgage locks for free.

There could also be fees if you adjust or extend your mortgage rate lock. If your mortgage doesn’t close within the lock period, you can discuss extending the mortgage rate lock with your lender. If the interest rate has remained unchanged or dropped, this extension may be free. If, the interest rate has risen, you may need to pay a fee to extend the lock period or lock in at a new interest rate.

Mortgage lock rate techniques

Interest rates fluctuate daily. As you're searching for houses and comparing loans, you'll see how those interest rates are doing day-to-day. You may notice patterns, such as dips or hikes that last a little while. Use this information and your defined budget to decide when to lock in your mortgage rate.

Another technique is to lock in the mortgage rate early on. Regardless of what the interest rates do, you'll know what you're in for. Should interest rates drop dramatically in the future, you may be able to refinance your home to take advantage of the lower rates.

Another tip, whether you're a first-time homebuyer or refinancing, is to negotiate mortgage rates with your lender. 

Lock your mortgage based on your needs

Every homebuyer has their own unique circumstances, so there’s no universal time to lock in a rate. It depends on you, the markets and your financial situation.

Some people are more comfortable locking in early on, while others prefer to gamble on fluctuations. One sensible rule of thumb is to lock in your rate when there’s a scenario that works within your needs and budget. You need to assess how much risk you’re comfortable with and go from there.

We know there’s a lot to think about when buying a home. Hopefully, this article has made it easier to understand locking in mortgage rates. For help with this or any other parts of the mortgage process, speak to one of our home lending advisors.