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Nov 18, 2021 | 4 minute read

What is a rate lock?

A mortgage rate lock provides predictability when buying a home, ensuring the loan interest rate stays the same throughout the purchase process.

It takes time to buy a house. From initial loan approval to final closing, several weeks may pass, and during that time interest rates can rise or fall. A mortgage rate lock does just what it says: It “locks” in the interest rate once you’ve qualified for the loan and protects you from an increase in rates that could cost you money in the long run. 

Let’s take a closer look at how a rate lock works, its advantages and disadvantages, and when it might be the right choice for you.

How a rate lock works 

When you are initially approved for a home loan, the lender offers you an interest rate on the money you’ll borrow. But approval is just the beginning of your loan’s journey, with processing, underwriting, and final closing to follow.

Meanwhile, interest rates can rise or fall from day to day. Those fluctuations are based on a number of financial and economic factors, and predicting them is difficult.

A rate lock is an agreement between you and the lender to guarantee the interest rate on your loan for a specific period of time, usually 30 to 60 days. It protects you from the higher costs you could face if interest rates rise between the time you are approved and your closing. 

It’s important to note that a rate lock can also prevent you from taking advantage of additional savings if interest rates fall. Even so, many buyers like the security of locking in their rate. It offers some certainty and keeps their budget on track.

You may have to pay a fee for a rate lock, while other lenders will offer one for free. Be sure to ask your lender about the terms of your rate lock. 

What’s the right time to obtain a rate lock?

When you are buying a new house, your loan offer generally comes at the time you reach a purchase agreement with the seller. If you’re happy with the interest rate and you feel more comfortable with the certainty of a locked-in rate, this is the time to ask about a rate lock.

While you might be tempted to wait a bit longer to see if interest rates go down, it’s difficult — and risky — to predict how rates will rise and fall between the time you sign your mortgage agreement and your closing. Generally, you’re better off obtaining a rate lock when you feel comfortable with the rate you’ve been offered.

What are the pros and cons of a rate lock?

The primary advantage of a rate lock is the protection it affords against interest rates that go up from the time you are initially approved for the loan until the time you close on it. 

Even a 0.25% increase in interest rates can result in a significant difference in your monthly payment as well as the amount of money you’ll spend over the life of the loan. Usually, the one-time cost of a rate lock is less than the additional amount of interest you would pay over time if rates increased even slightly while your loan is being processed.

Another advantage of a rate lock is that it can prevent the possibility of having to come up with a higher down payment. If interest rates rise and result in a higher monthly payment on your loan, the lender might require you to make a larger down payment, straining your budget.

The main disadvantage of a rate lock is that it could keep you from benefiting from interest rates that fall after your loan is approved. But keep in mind that you can still take advantage of lower rates in the future by refinancing your loan at some point.

Even if you miss out on the savings of lower rates due to a rate lock on the front end, you may be able to recoup some of those funds through refinancing.

Key takeaways

A rate lock can help you plan your budget and guard against additional costs, but be sure you understand how it works. Ask the lender any questions you have about the rate lock and its terms, consider your own financial situation, and weigh the pros and cons before agreeing to one. 

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