Posted: 2019-10-22 | Author: Scott Roberts
Mortgage rates fluctuate from week to week, day to day, even hour to hour. Most of the time, these fluctuations are small, but sometimes, there are significant changes (to the rate) even in the same day. Although experts in the mortgage industry study a wide range of indicators to try to gauge which way mortgage rates may be heading, at the end of the day, no one can accurately predict whether the rates will go up or down.
Home buyers have the option to lock in their mortgage rate in order to remove the uncertainty about which way the rate might go. A rate lock is a guarantee from a lender that the borrower will be able to finance the property at a certain interest rate with certain terms and conditions for a specified period of time. This protects the borrower from a potential spike in rates, allowing them to close on their property without any worry that their rate and the overall cost of the loan might significantly change.Rate locks usually stay in effect for 30, 45, or 60 days depending on the specific terms and conditions of the loan. In some cases, the lock period could be as short as a few weeks. In other cases, the lock period could last for 90 days or longer, or it could be extended from its original term if the lender agrees to that. There will usually be fees attached to a rate lock, unless it is for a very short term. In general, the longer the lock period, the more it will cost you.
When Should I Lock in My Mortgage Rate?
This is one of the questions most frequently asked by home borrowers. As always, the right time to lock in a mortgage rate will differ from one borrower to the next. That said, there are some general principles that should be followed.
First of all, it is best not to lock in your mortgage rate until after you sign a purchase agreement for the property you want to buy. If you lock in before you have agreed to buy the home, your lock period could expire before the loan closes if there are any unforeseen delays. This could cause you to lose out on the rate you wanted, which would mean that any fees you paid to lock in the rate would be wasted.
The second thing to keep in mind is that trying to “time the market” is a futile effort. Just like with trading stocks, there is no way of knowing for sure which way the interest rates will go from one day to the next. If you are happy with the interest rate that is available and the monthly payments fit comfortably into your budget, then locking the rate in might be a good idea as an insurance policy against the possibility that rates might take a sharp jump in the future.
What if Interest Rates Drop after I Lock in my Rate?
If interest rates go up after you lock your rate in, this is the best possible scenario for you. You are already “locked in”, and you are protected from a rate spike. When this happens, whatever you may have paid for the rate lock will usually be well worth it as you will probably realize far more savings because of the lower rate you received.
Of course, there is always the possibility that interest rates will drop after you lock in. This will usually mean that you miss out on the lower rate, but again, you cannot time the market. The best approach is to have the mindset that, if you are happy with the rate you locked in, you will not worry about any fluctuations that happen after that.
If you still want to have the opportunity to capitalize on a lower interest rate (if rates go down), you could obtain a rate lock with a “float down” provision. This would give you the option to grab a lower rate (if one is available) before you close on the loan. The catch is that float down provisions will cost you extra, so you need to weigh the cost of this provision against the likelihood of a significant drop in interest rates.
Have Further Questions about Mortgage Rate Locks? Speak with a Local Lending Specialist
Locking in your mortgage interest rate can be a good strategy if you have already signed a purchase agreement and you are happy with the rates that are currently available in the marketplace. But there are several factors to consider with mortgage rate locks, and it is always helpful to discuss your specific circumstances with a local lending expert. A local expert can go over your situation and show you all of the options available to you, so you can make the most informed decision on how you wish to proceed.
