Over the last several years we have enjoyed record-low mortgage rates that have, for the most part, been stable. The most recent peak in interest rates was November 2018 with an average reported rate of 4.81% for 30-year loans. Afterwards, the trend moved downwards until it hit bottom in January 2021 at an average 30-year rate of 2.73%. Rates appear to have bounced with the average reported 30-year rate of 3.17% in March 2021. During times of stability, the question of whether to lock the interest rate while you are under contract on a home is not as critical as when there are times of rising or falling interest rates. In recent weeks, there has been upward pressure on rates, making it a more relevant conversation.
To lock or not to lock, that is the home buyer’s choice. However, buyers need to understand this is a commitment from both the mortgage lender and themselves to close at the agreed upon interest rate.
The scenario goes like this: One day you write a contract on a home knowing you can afford it at a certain interest rate. Then while you are waiting to close, the interest rate increases, and you can no longer afford the monthly payment. Locking in the interest rate with the mortgage lender would have prevented this unfortunate circumstance.
First of all, what is a “lock”? A “lock” is a commitment from a mortgage lender to fix your interest rate between time of contract and closing, even if rates go up. Yet it is important to remember that “a lock is a lock” from both parties. It is also a commitment from the home buyer to close on the terms of the lock. Even if interest rates go down, you are committed to close as agreed upon.
The lender might suggest that the buyer should “float” rather than lock. This means that in the lender’s opinion, there could be an event in the next few days or weeks, which might cause rates to go lower. You can then wait until after that event to make a decision to lock at that time.
Over my 40-year career, I have found, in general, interest rates tend to drop slowly and rise quickly. I can remember during the 1980s, almost every day I went into work, the interest rate pushed higher, soaring to 16% for mortgages! With that experience in mind, it is usually best to lock in a rate if the overall trend is upwards. There’s a greater chance of rates going up 1% in a day than going down 1% in a day. If you’re happy with the interest rate the day you write a contract on a home, lock it in so you and all the others involved in the home purchase can sleep at night.
Market conditions dictate the type and pricing of locks that lenders may offer. Sometimes a 30- day or even 60-day lock might be “free”. Extended locks, however, usually come with a price tag. Make sure you communicate with your lender to make sure you have a full understanding of how it works. It would also be helpful to ask the lender what happens in case there is a delay in closing? There might be a possibility to extend the lock, but lock extensions usually involve a fee.
All interest rate locks have a deadline. Knowing that deadline helps structure a contract with dates for conditions and final closing to happen before the lock expires with a closing date that falls within the deadline. In some market conditions, lenders have even been known to offer “lock and shop”. This is a situation where the lender will lock your loan rate in even before writing a contract.
Locks can also be a major consideration in new construction. If you have a dirt start on a home, that could mean you may not be closing for six to eight months. It is hard to say what could happen to interest rates during that time frame. Most builder contracts will say that you will close on the home at whatever the market rate of interest is. In order to protect yourself, it would be a good idea to check with the lender to see what the expense of a long-term lock would be. Market conditions will dictate pricing for long-term locks. An alternative could be to “float” with the interest rate market. Instead of paying the lock fee in advance, you could save that money to buy the rate down at time of closing. Of course, market conditions will dictate whether or not that turns out to be a prudent idea.
To lock or not to lock? Hopefully this information will help you make that decision. Be sure to consult your mortgage lender and any other advisors, to make an informed decision based on current market conditions.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.