My husband and I are considering buying a long-term rate lock for the Passive House we are building. I shared our financial debate behind the decision to build or renovate back in December, 2014. Well folks, we bought land and are moving into the design phase! In the meantime, there is broad consensus that the Federal Reserve is going to raise interest rates, which means the banks that sell mortgages are going to raise their rates.

Should we pay a fee to lock in current mortgage rates?

I’m not a technical person so I’ll keep this post in simple terms.

What is a rate lock?

A rate lock is an agreement between you and a bank to guarantee a certain interest rate for your mortgage. Sounds great, right? But you pay for this guarantee. Typically, you pay either a flat fee or an amount tied to how much money you are borrowing via your mortgage.

A rate lock is often for 30-60 days, but you may be able to lock in your rate for 90 days (perhaps for an additional fee).

What are the downsides to a rate lock?

The Wall Street Journal warns of the downside in this article:

But borrowers should be cautious: Interest-rate locks often come with fees that can eat into savings and can prove costly if rates go down instead of up.

Rate lock agreements can include a “float down” clause, letting you get an even lower rate if rates drop. However, you may pay an extra fee for that flexibility, making it imperative that you weigh the possibility of rates dropping. For us, we are very sure that rates are not going to decline soon – and I’m not giving financial advice here – that’s just my interpretation of the newspaper articles I read. But you never know when things can change.

If you don’t end up needing the rate lock before your agreement expires, you may lose your fee and deposit. Ouch!

How do I protect myself?

Make sure to get every detail in writing. A rate lock is a formal agreement with a bank so don’t buy any talk about verbal agreements or even email messages. You need to sign paperwork with your bank. And don’t pay anything until you have carefully read the written agreement.

What other options do we have?

We can wait until we are ready to get the construction loan (a type of mortgage). Right now, we’re not exactly sure when we’re going to have all the town approvals and permits in place. If we wait, we can get quotes from more than one bank, there may be some wiggle room to get the best rate. This “wait and see” process avoids the cost of a rate lock, though interest rates may have increased between now and then.

There are also plenty of options, like NPBS fixed rate home loans.

Where can I go for more info?

This page from the Federal Reserve looks a bit outdated, but the info is solid. They have even provided a downloadable PDF guide to rate lock ins. I also found this page on Zillow helpful.

Are you considering a mortgage rate lock?