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Does locking your mortgage rate make sense? Or should you have a floating rate so you can take advantage of a rate drop?
Here are a few things to keep in mind as you weigh your options. But first, let’s talk about what these terms mean.
Locking Your Mortgage Rate vs. a Floating Rate
When you apply for a mortgage, the lender will ask you early on if you want to lock in your rate. They’re essentially saying you can finalize the interest rate you’re willing to pay. From that point of the mortgage setup process, the rate you locked in for your mortgage will remain the same no matter how much the market’s rates change.
A floating rate means your interest rate can change. If market rates go up, so does yours – along with your monthly payment. If rates go down, yours can as well.
Advantages to Locking Your Mortgage Rate
The first benefit to going down this path is easier budgeting. You know how much your monthly payment will be early on in the mortgage process, helping you budget accordingly. For example, if you bought a $350,000 home with $70K down and a 3.8% interest rate, your monthly payments would be around $1,588 per month.
But if you don’t know what your rate will be, you can’t really estimate that. Interest rates fluctuate all the time. You won’t know what kind of interest rate you’ll end up with until the very end of the underwriting process. It could end up at 3.8%, but it could also end up a bit higher. You can’t budget as effectively without knowing.
The second benefit is tied to the first. Because you know how much your payment will be, you don’t have to worry about your rate going up. A floating rate would allow fluctuation – what happens if your rate jumps up to 4.1%? Now you’re paying $1,636 per month or about $17,280 more throughout the 30 year mortgage.
The third benefit to locking your mortgage rate with your lender is peace of mind. The world has been crazy over the last few years. COVID has rocked the entire world, causing logistics issues, labor issues, inflation – you name it. It’s caused anxiety and instability, causing the housing market to do crazy things.
If you take the conservative route as a borrower and lock in your rate, you don’t have to worry about this instability. You can sleep easier at night knowing your mortgage rate is locked in at something you’re happy with.
Disadvantages of Locking Mortgage Rates
There is only one downside30-year to a mortgage rate lock. The first is that you’re preventing the potential opportunity to have an interest rate drop. Let’s say we have the scenario above, where your rate was locked at 3.8%. Then maybe the market rates dropped, so you would’ve been able to get a rate of 3.6% instead.
The lower rate of 3.6% would mean a lower payment of about $1,556 per month – a savings of $32. That would add up over time to be about $11,520. So you’re missing out on those potential savings by locking in your rate.
The second downside is that some lenders require you to pay a small fee to lock in your rate. Not all lenders do this, so just make sure you ask.
Does locking in your mortgage rate make sense when buying a home? We usually recommend it. For most borrowers, the advantages outweigh the downsides, though that doesn’t mean it’s right for everyone. Send us an email at [email protected] and we’ll see if it makes sense for you.