The interest rate is one of the most important things on your mortgage. If you take a higher rate, you are stuck with it until you sell, refinance, or pay off the loan. Many people focus on this number when they are trying to decide if they can afford a new mortgage. While there are other factors that influence the stability and affordability of your mortgage, the rate should play an important factor. One way to ensure that you get the rate you want is to lock it in, but first you have to know how and when to do this so that you have the best outcome.
What is a Mortgage Lock in Rate?
A mortgage lock-in rate is a rate you agree to pay the lender. The lender is obligated to lock the rate at the time that you say you wish to lock it. The length of time you lock the loan for will determine the adjustments that are made. For example, if your loan is pretty much ready to go, you will not need a lock for more than 15 days or so, but if you are just starting out in the process, you will need a locked rate that does not expire for at least 30 to 60 days. If the rate lock does expire, you are usually subjected to the current interest rates, which could be higher or lower than your locked-in rate or you might have the option to pay a fee to extend the lock.
Timing with the Loan
The most important factor to consider is the timing with the loan. Most lenders suggest you lock a rate in right after you obtain approval for the loan unless you have not yet found a home. If that is the case, then you should lock the rate as soon as you find a home and the bid is accepted. If you do not have a contract on a home yet, it can be hard to guess how long it will be before you have one. This is vastly different from when you have a contract, but do not have final approval on your financing yet. This case is less worrisome especially if you have a preapproval already, enabling you to lock the rate in right away. As long as you are diligent about providing the lender with what he needs, you should be able to close in time before the rate lock expires.
How Rate Locks Differ in Price
Lenders have different ways of charging for rate locks. Typically, the shorter term locked rates do not cost anything as they are due to expire in less than 30 days, giving the lender the peace of mind that you will go through with the loan. On the other hand, if you take an extended rate lock, you might have to pay for it. For example, one lender might charge a full point on a 60-day rate lock while another lender will charge half of a point; the amount charged is up to the individual lender. Another way the lender can charge you more for an extended lock-in period is by charging a slightly higher rate, but not charging you any points up front.
What’s your Situation?
The determination between whether you should wait to lock in a rate or do it now depends on your financial situation. Talk to the lender to see how close you are on the approval. If you have a borderline debt-to-income ratio, it is important to lock in the lower rate when it is available in order to avoid going over on your DTI and losing your loan approval. In this case, you will need the lender’s input to decide what to do. If you lock in the lower rate early, you avoid the risk of losing your approval, but you also run the risk of paying a higher interest rate than the current rates, but since there is no way to predict what will happen, it is usually best to just lock it.
Dealing with Changing Rates
So what happens if your rate lock is still in effect, yet rates come down quite a bit? Lenders typically have one of two options:
- Charge you a small fee to float the rate down
- Let you go to another lender
The obvious choice for most lenders is to charge you the fee and let you float the rate down as they do not want to lose your business. If the rates fluctuate enough, it is important to ask your lender their policy on float downs.
If your rate lock expires, again, most lenders will work with you, charging you a small fee to extend the lock, especially if the circumstances were outside of your control. This does not mean if you dragged your feet in getting your documents to the underwriter, however, so make sure you are timely with your documents so that you do not run out of time.
The perfect time to lock in an interest rate really depends on the circumstances surrounding your loan and the purchase of a home. If you are refinancing, the process is a little more predictable, allowing you to lock it in for 30 to 60 days with no worries. If you are shopping for a home, though, you will have to time the process perfectly in order for everything to fall into place.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.