Should I Lock My Mortgage Rate Today?

Deciding when to lock your mortgage rate may be one of the biggest financial decisions of your life. If you don’t lock and interest rates rise, you could end up paying thousands of dollars more over the life of your loan. If you do lock and interest rates fall, you could miss out on major savings.

Key Takeaways

• Closing your mortgage rate quickly can help you close your loan on time. 
• Failing to lock your rate will delay your closing. If you miss your closing deadline on a home purchase, you could lose that home. 
• Mortgage rates are affected by dozens of variables, and nobody can accurately predict what rates will be in the future.

How Mortgage Rates Work

A mortgage rate is the interest rate that you pay on your mortgage. Rates generally rise and fall throughout the day by a fraction of a point and can rise and fall by several points over the course of a year. With a long enough timeline, mortgage rates can change drastically.

Rates Over Time

In 1981, the average 30-year mortgage rate was 16.63%. Over forty years later, in 2024, the average rate is 6.35%.

Deciding When to Lock Your Rate

Deciding on when to lock your rate can be very difficult. You can spend hours reading news reports, data on the bond yield curve, analyses of inflation rates, job market growth, and memos from the Federal Reserve, and still wind up feeling even less certain of when to lock in your interest rate than when you started. 

One large natural disaster, an impactful day on the stock market, or a terrorist attack can change mortgage rates significantly, and these can be hard to predict. As of 2024, rates are gradually falling due to the expectation of Fed rate cuts. However, without a crystal ball, predicting a future mortgage rate is much like predicting the value of a specific stock.

If you are considering purchasing a home or refinancing a mortgage, locking your rate in the near future is likely to save you the most money.

If you’re actively shopping for a home, keep in mind that the current real estate market is competitive. Many accepted offers include a short timeline for closing, and locking your rate quickly helps you close on time. If you delay locking your rate, you may miss your deadlines and could potentially lose out on your home. In this situation, locking as quickly as possible is advisable.

What if Mortgage Rates Fall After I Lock?

You still have options if mortgage rates fall after you lock your rate. You may be able to stop the process with your current lender and start over with a different mortgage lender to lock in a lower rate. If you’ve paid any appraisal fees to the first lender, you’ll still have to pay them with the second. Starting over with a new lender may also delay closing, which could mean losing out on your house if it has a strict closing deadline and will mean that you wasted your first lender’s time. Some lenders even charge additional fees if you cancel the process, so make sure that you check for fees before deciding to start over for a lower rate.

What Role Does the Federal Reserve Play?

The Federal Reserve plays a significant role in determining your mortgage rate. While the Fed doesn’t set mortgage rates directly, it does set the federal funds rate. The Fed meets eight times a year, and mortgage rates change both in anticipation of what the Fed will do and in reaction to what the Fed actually does.

The Fed has signaled that it will start cutting rates, which has already sent mortgage rates lower. Suspected future rate cuts are expected to continue to cause mortgage rates to drop.

What Happens if I Never Lock My Mortgage Rate?

You will eventually have to lock your mortgage rate, or you won’t be able to close on your loan. Your lender must give you closing disclosures within specific timelines that detail your rate and closing costs. Your lender can’t prepare an accurate closing disclosure if you don’t lock your interest rate. If you delay locking your rate, you may end up with a much higher interest rate if rates rise. If you’re close to the limit of your budget, then a higher interest rate may actually make you ineligible for your loan.

The Bottom Line

Choosing when to lock your mortgage can be an excruciating process for those of us who overanalyze everything. Almost every major event can and will affect mortgage rates and cost or save homebuyers thousands of dollars.

Read the original article on Investopedia.