Do you know today’s interest rate on a 30 year fixed rate loan? Chances are that this rate has already changed since the last time you’ve looked! Mortgage interest rates are adjusted daily to reflect the supply and demand of available funds, and all too often buyers are disappointed to learn that their ideal loan rate is no longer available.
To avoid surprises at the offering table, many buyers will plan ahead and lock in a favorable rate. Basically, this is a promise from a lender to hold an interest rate and points at a guaranteed level for a fixed amount of time. Lenders can do this for qualified buyers even before the house is selected (in some instances)! Securing a lower interest rate in anticipation of rate hikes can save you thousands of dollars over the course of repayment. For example, if you planned to borrow $300,000 at 6 percent for 30 years, but didn’t fill-out a loan application before the rate rose a quarter-point to 6.25 percent, you would be facing extra finance costs of more than $17,000!
Locking in an interest rate ahead of time is an attractive option to many home buyers because it can give you a sense of certainty when budgeting a move and planning the future. Lenders who lock rates do so at the risk of losing money should rates increase. If a buyer locks in a favorable rate today, and rates increase, then the lender is at a disadvantage and will have to cover the difference.
To mitigate risk, lenders charge a small fee for this rate lock in the form of points. A point is a percent of the loan’s amount, and the amount of points required to lock a rate depend on the duration of the lock (longer rate locks cost more), and the type of mortgage loan you are looking at. Locking in a rate for a new construction loan works differently than for a pre-existing home, for instance.