One of the biggest concerns homebuyers have when it comes to closing is their interest rate. Getting the best possible interest rate can make a huge difference in both your monthly payments and the overall cost of the mortgage. Even half of a percent can create a big change in your bill. That’s why homebuyers will often spend a lot of time and effort in shopping around for the lowest interest rate on their loan. One option that many homebuyers are choosing is to lock in a good interest rate when they find it. For those buying a new construction home, it may be an even smarter choice.
What It Means to Lock In Your Interest Rate
Mortgage interest rates can change on a daily basis. Over time, they will float up and down and there is no easy way to predict what they are going to do. Because of that, it can cause a potential homebuyer a lot of anxiety. They may be able to afford monthly payments at the current interest rate. By the time it comes to close, though, they may be looking at a higher rate that changes the monthly payment.
Locking in an interest rate means you’ve come to an agreement with your lender about the terms of your mortgage, including what interest you will pay. When that happens, you’ll agree to lock the rate in for a certain period of time. This is usually 30 or 60 days for traditional home sales, though typically longer for new construction homes. Now no matter if the market rates go up or down, your rate will stay the same.
How Locking Your Interest Rate Could Help You Save
Locking in your interest rate could potentially help you save a lot of money on your mortgage. Let’s look at an example:
Say you need a mortgage on a $300,000 loan. Initially, you get a rate of 4%.
$300,000 (loan amount) x 4% (interest rate) for 30 years = $1402 monthly payments (total cost of the mortgage becomes $515,609)
You fail to lock that interest rate in, though. By the time you come to the closing table, you have to pay 4.5%.
$300,000 (loan amount) x 4.5% (interest rate) for 30 years = $1520 monthly payments (total cost of the mortgage becomes $547,220)
That half of a percentage is now costing you $118 more each month and an incredible $31,611 over the lifetime of the loan.
That’s why locking in a good interest rate is a smart move for a homebuyer. You’ll know that you are getting a deal that you can afford. There aren’t going to be any unpleasant surprises when it comes to signing your closing paperwork.
How to Lock In Your Interest Rate
Many lenders will offer the option to lock in your interest rate. If you aren’t sure, ask them about it. Most interest rate lock programs come with an extra fee. You’ll want to make sure that the fee you are paying to lock in the interest rate is actually worth it. In most cases, it will be, but it’s a good idea to look at the math and compare what you are paying now to what you could save over time.
It’s difficult to predict what interest rates are going to do, so the best time to lock in your rate is when you have a comfortable monthly payment. It’s not worth trying to outguess the market and wait for a lower rate. However, there are some programs (including ones on new construction homes) that allow you to “float down” to a lower interest rate if it becomes available. This can give you even more peace of mind, because you won’t worry that you’ve locked in too soon on a higher interest rate.
Once you’ve decided to lock in your interest rate, make sure you have a plan that gives you plenty of time until closing. If your rate lock ends before you close on your home, it may cost you a fee to extend the lock or you may end up paying for the higher rate. Give yourself a little padding in the timeline. Closings are often pushed back and you don’t want to be sweating the deadline. Lenders and new-construction developers are usually pretty good at working with their buyers to help with the fees associated with the extension if it’s needed.
Why It’s an Even Better Option for New Construction Homes
Interest rate locks are often available for both traditional home loans as well as those for new construction. According to Realtor.com, it takes the average buyer about 50 days to close on their new home. That means a 60-day rate lock is going to be a comfortable option for most home buyers. But that average closing date can vary greatly when you are talking about closing on a new construction home.
That’s because from the time you decide to buy a new construction home and when you actually close on it is often much longer. That gives the market a lot more time to fluctuate. You may fall in love with a property that won’t be ready to close on for up to 10 months. Are you prepared to take your chances on interest rates over the next 10 months? Probably not. That’s why locking in a good interest rate can be even more important when you are waiting to close on a new construction home.