Does It Make Sense to Lock In a Mortgage Rate?

Timing the market to land a mortgage with the lowest rate possible is like trying to hit a moving target. It’s not impossible, but it takes patience and a keen eye, particularly in today’s volatile market.

Mortgage rates can fluctuate over a few days or several weeks. The leading indicators that influence rates vary depending on the type of mortgage for which you’re approved and whether it’s a fixed rate or an adjustable rate (or ARM).

Before the downturn, some mortgage rates could be tracked and predicted relatively easily because a few leading indicators were more closely bound to rates, says Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm. For example, fixed-rate mortgages moved in closer lockstep with 10-year Treasury yields than they do now. Now, those rates are heavily influenced by other factors, including the unemployment rate, consumer spending and fear of inflation, he says.

According to the most recent data from HSH Associates, average mortgage rates are down from one month ago. The average rate for a 30-year conforming mortgage was 5.42% for the week ending July 31, compared to 5.55% for the week ending June 26. The average rate on a 15-year mortgage for the last week of July was 4.85%, down from 5.01% in the last week of June. And the average rate on a 5/1 ARM (the most common ARM, whose interest is fixed for the first five years and then becomes variable) was 4.89%, down from 5.14% in the week of June.

These lower rates are well above the near-historic lows they touched earlier this year. For the week ending May 1, the average rate on a 30-year fixed mortgage hit 4.96%.

“Trying to time the bottom of the marketplace is like trying to time the stock market,” Gumbinger says. “Even insiders don’t know when interest rates may change quickly.”

Borrowers can lock in a mortgage rate with a few weeks or more left until closing is completed. This is particularly useful if the borrower believes rates will soon increase. But navigating this process can become tricky and even costly.

Here’s what borrowers should know about locking in mortgage rates.

When is the right time to lock in a mortgage rate?

In most cases, buyers must first find the home that they want to buy and sign a purchase agreement on it. That often requires a deposit of around 5% of the home’s purchase price, says Gibran Nicholas, the chairman of the Ann Arbor, Mich.-based CMPS Institute, which trains and certifies mortgage lenders and brokers.

Then, once your lender has told you the mortgage for which you have qualified, ask if you can lock in the rate through the closing process, which usually lasts around 30 to 45 days.

How much does it cost to lock in a rate?

Lenders who allow borrowers to lock in a rate for around 30 days often won’t charge a fee, says Chip Cummings, president of Northwind Financial, a Grand Rapids, Mich.-based training and consulting firm for mortgage and realtor firms.

Borrowers who anticipate that closing will take longer, can request to lock in a rate for 45 or 60 days, which most lenders will let you do for free or for a one-time fee of up to 0.50% of the total loan, Nicholas says. Some lenders permit lock-ins for up to 90 or 120 days for, say, borrowers who haven’t found the home they plan to purchase, but you’ll have to pay a fee of 0.50% to 2% of the total loan amount.

Home buyers who have about a week left until their lock-in expires should contact their mortgage company to confirm that their closing will wrap up within the week or to inquire about extending their lock, Cummings says.