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Should You Lock When Mortgage Rates Rise?

National average 30-year, fixed-rate mortgage interest rates have been close to or well under four percent (and often three percent) for over a decade. They should stay that low forever, right? 

Don’t bet on it. Fears of inflation, the federal deficit, and other reasons are why interest rates are expected to rise this year. What happens is that the Federal Reserve raises overnight borrowing rates to banks, causing banks to pass those higher costs onto borrowers. Car loans, credit cards and mortgage loans become more expensive. 

But don’t let rising rates discourage you from buying a home. While you’re going to pay more for your loan in interest, with a correspondingly higher monthly payment, you’re getting higher standard tax deductions in 2018 ($13,000 to $24,000 for couples filing jointly, $6,500 to $12,000 for single filers.) Child care credits are more generous, and your mortgage interest payments are still tax deductible, up to loans of $750,000 or more. 

According to the mortgage calculator at Bankrate.com , a home purchased by a borrower with excellent credit for $400,000, with 20 percent down ($80,000) and a benchmark 30-year fixed-rate mortgage at 4%, would have a monthly payment of $1527.73. If rates hit 4.5%, the same borrower would pay $1621.39 monthly, or a difference of about $94. Roughly, every increase of 1/8th of a point translates to a little less than $25 per month more in your payment. 

But, for some homebuyers, the 4.00 percent 30-year fixed mortgage rate is a line in the sand they have no intention of crossing. So where does that leave borrowers like you who are shopping for loans? It may seem counterintuitive, but you might consider locking in your rate before interest rates go any higher. 

Locking a rate simply means that the lender will not raise or lower the rate during the lock period, so you’re sort of betting that you’ll save money. You can lock in a rate anytime once you’ve applied for a loan, but you have to be preapproved by the lender before you can lock in your rate.   

Most lenders offer a loan lock period of 30, 45, 60 or 90 days. The longer the lock, the more you’ll pay for the loan, so most people wait until they’ve put a home under contract before they lock in their rate with the lender.  

Dont assume that the time to lock in a rate is when rates go lower, locking is most effective when a market is volatile. It’s better to be safe than sorry, because no one knows which way rates are really going to go. That leaves you, the borrower, caught in the middle of fluctuating markets. The best thing you can do is talk to your lender and develop a strategy for your loan. A good lender will watch the market carefully, and try to get you the best rate possible.