Your mortgage interest rate is one of the most unpredictable and fluctuating factors surrounding your mortgage application so when you have the opportunity to lock your mortgage interest rate, you generally should. Before you do so, however, there are a few things you should consider to make sure it is the right decision for you.
Definition of a Locked Interest Rate
When a lender provides you with a quote for an interest rate on your mortgage application, it is just a quote. This rate could change at any given moment depending on the factors in the market that it is tied to at the time. Until you lock the interest rate, which usually occurs once your file is approved and you have a contract signed on a house, that rate can change daily and sometimes even a few times a day. A lender is not going to quote you a rate that you can lock until all of the pieces of the puzzle are put together.
What Affects the Interest Rate?
The interest rate is affected by a variety of factors – no two borrowers get the same exact quote. The lender will look at many things like:
- Credit score
- Actual credit history
- Employment history
- Housing history
- Debt ratio
- Amount of assets
- Any special circumstances surrounding your loan
Generally, anything negative in your file will cause the mortgage lender to increase your interest rate and anything positive will enable him to avoid making adjustments to that day’s rates.
The Right Time to Lock your Mortgage Interest Rate
The time of when to lock your mortgage interest rate really depends on your situation. It would make sense to think that as soon as you find a house and sign the contract that you should lock the rate, but that is not always the case. There are a few things you have to worry about, but mostly you have to be concerned with the rate lock expiring. Rate locks are not good forever; if they expire, you are either subjected to the current rates, even if they are higher or you have to pay to extend the rate lock.
Determining the right time to lock your rate should depend on the complexity of your file. Does the underwriter think it will take a while to get your file approved? If so, then you should hold off on locking the rate. If you are already through most of the approval process and are simply waiting for the housing contract to get finalized, you are in a better position. Of course, the closing date set in your housing contract should also determine when you should lock your rate.
Paying for a Rate Lock
The good news is that not every rate lock costs money. The standard locks a lender offers will generally be free. If you cannot commit to the short time frame of these locks, however, you might find yourself paying a fee for the lock. Generally, if your lock period is less than 60 days it is free. Any longer than that, though, and the lender might start charging simply because there is such potential for the rates to go up during that time that the lender could be missing out on significant profit by providing you with a long-term locked in rate.
Know the Consequences
One way to determine if you should lock your mortgage interest rate or not is to understand the consequences of an expired lock – some lenders will give you today’s rates while others will allow you to pay a fee to extend the lock. Yet others will charge you the “worst case” between today’s rates and the rate you locked, which is how they make up the difference in what they lost by you not closing on time.
Deciding whether or not you should lock your mortgage interest rate is a personal decision. How much of a risk do you like to take? Did you do your homework to see what rates have been doing lately? History often repeats itself when it comes to interest rates, so pay close attention to the patterns that have been occurring before you make a decision. Of course, the details surrounding your application and mortgage file will also play a role.
The best thing to do is ask your lender’s opinion regarding rates and how they pertain to your file. Together you can come up with a plan to ensure that you get the best rate available to you.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.