One of the most important financial considerations of buying a new home is the interest rate paid on the mortgage. Over time, a higher interest rate can add thousands of dollars to the true cost of buying a home. When interest rates are low or steady buyers have greater confidence that they will get a favorable rate when they go to secure the loan, but in our current environment of rising interest rates, many lenders are suggesting a rate lock at the time of pre-approval.
What is a Mortgage Rate Lock?
A rate lock freezes the interest rate on a mortgage for a period of time before the close of the loan. Typically lasting for 30-60 days, the lender guarantees the rate will not change during this period for a fee that is paid when you agree to the loan terms.
A mortgage lock protects the borrower from rising interest rates while the loan is processed and approved.
When should you lock in a Mortgage Rate?
Lenders will offer to lock in the rate at the time of loan approval. With escrow periods of 30-60 days, the lock assures the buyer that their rate will not increase during the time it takes to complete the loan process.
In a period of rising interest rates, as we see today, locking the rate may be a smart idea. The borrower will pay a higher fee for the lock, as the lender is also taking a risk, but it could be worth thousands of saved dollars over the life of the loan. Even a small increase in the interest rate can have a huge financial impact.