One of the most tricky parts of getting a mortgage is locking on a rate. If you happen to be shopping while mortgage interest rates are low, you might want to take advantage of the climate and make sure you get that interest for your loan before it changes. In order to secure this interest, you lock in on the rate.
Breaking down “rate lock”
When you lock in on a rate, you are protected from certain changes in interest rates during that allowable period. Typically, lenders allow borrowers to lock in between 15 to 90 days, though this may vary on whether you are purchasing a home or refinancing.
A simple point decrease in interest rate can save you thousands of dollars throughout the life of the loan. That is why many borrowers consider this part of the financing process important. If a small change in interest would affect your budget, it is best to lock.
Timing is everything
Timing a rate lock is like shooting a moving target. There is no certain pattern as to how rates could behave in the future. You can start locking in as soon as you get your loan approval. But if you are worried about your rate lock expiring before you find a home, you can lock later, or have it extended at a cost.
The longer you lock, the more costly it will be. So it is much advised that you evaluate your situation properly before you decide to lock. The most important considerations could be either:
- a) you expect the rate climate to remain steady – or not – in the near future; or
- b) a single point difference in the rate can mess up your financial plan.
Working with professionals
It is very possible that the rate will drop while you are locked in. Because your best interest is to get the lowest rate deal possible, you can still take advantage of the new low by either a) floating down at a cost or b) locking in with another lender. The latter might be a problem and could be a bit awkward especially when your lender has already put in much effort in your application. However, many lenders can negotiate with you on this just to prevent losing business.
If you want to make a smarter and more informed decision on rate locking, work closely with your lenders, agents, or financial adviser. They can provide you with more insight on existing market conditions.
It is important to note that you can still lose your locked in another way and that is messing up with your finances while you are at the process of home loan application. Do not make important financial decisions that could affect your credit while you are at it. Consultwith a financial professional if you are hesitant.