The decision to lock or float an interest rate can create a high-stress situation for many people -- after all, few of us take out more than a handful of mortgages during our lifetimes. "When should I lock my mortgage rate?" is a legitimate question, and we'll answer it here.Click to see today's rates (Oct 20th, 2017)
Locking in a loan means you commit to accepting a specified rate, even if the market moves lower. The lender, for its part, commits to funding your loan at a specified rate, even if the market moves higher. Both you and the lender take on risk when you lock.
Your mortgage rate lock expires in a certain number of days -- seven, for example, or 15, 30, 45, 60 or longer. If your lock expires, you have to re-lock or extend your lock before you can close.
Your mortgage rate must be locked before your lender can draw up your loan documents. Your loan can't close until its interest rate and costs are established, and that happens only when you lock.
The answer to the question, "When should I lock my mortgage?" depends on the length of your escrow. When you choose the term of your mortgage rate lock, the shorter the term, the lower the rate.
For instance, your lock choices might look like this for a 30-year fixed loan at 3.75 percent:
So you'll have to weigh the pros and cons of locking earlier for a longer period (more expensive), or waiting to grab a lower rate with a shorter lock (riskier).
The best time to lock your mortgage depends on a few things. First, does your purchase loan approval depend on securing a certain rate? If it does, and that rate is available, you should probably nail it down. You don't want to lose the house you're buying.
If you're refinancing, you'll want to wait until rates hit your wheelhouse. To get your best mortgage rate, have your loan pre-approved and continue to update your approval as needed. Then, you can slam in a lock when your rate becomes available and close quickly.
How high could your interest rate go if you fail to lock in time?
Looking at the most volatile weeks since Freddie Mac started keeping track in 1971, there are ten weeks in which rates changed by .5 percent or more during a one-week period. In fact, the worst week ever showed a 1.4 percent increase!
The good news, however, is that there were only ten really bad weeks. Ten weeks out of nearly 2,400. That's not too bad.
And the average movement over a one-week period is only .0014 percent. The difference between 4.00 percent and 4.0014 percent on a $200,000 loan is just $1.61 per month.
However, that figure includes many, many weeks in which the average 30-year fixed rate did not change.
When rates actually change, they do it at an average rate of .071 percent when they drop, and .075 percent when they rise.
A .075 percent rise would add $8.67 to a $200,000 loan payment (at 4.075 percent).
Notice that rates rise a little more sharply than they fall. That's something to consider when determining your appetite for risk.
Mortgage rate locks should be executed in writing. The rate lock form should indicate the interest rate, the number of days you'll be locked, and the points charged.
You complete the form and get it to your lender. Some borrowers request a rate lock via phone and get the paper confirmation later. Just make sure you get a written copy of the lock so there are no ugly surprises at closing.
Once you are locked in, that's the rate you get -- as long as you close before your rate lock expires.
Note that you cannot lock in a rate for a property To Be Determined (TBD). A rate lock must have a corresponding address to be valid.
Most of the time, mortgages close on time and while the borrower is locked in.
But sometimes, the loan does not close on time. Your rate lock agreement should tell you what the consequences are for "blowing a lock," and how you'll deal with them.
For example, here's what typically happens when you blow a lock, and:
The only really bad outcome occurs if rates increase while you are locked. Fortunately, interest rates rarely make sudden, huge leaps that would explode the cost of your home.
For example, one of the largest sudden increases in mortgage rates occurred after the 2016 US Presidential Election -- 37 basis points, or .37 percent in one week. For a $200,000 mortgage, the difference between a loan at 3.5 percent and one at 3.87 percent is $42 a month. Not enough to derail most mortgage applications.
You can extend your rate lock, usually at a cost for a certain number of days. You may be able to get a day or two for free, and then pay a fee, for instance, .25 points, for a seven day extension.
Your other option is relocking. That means locking in your loan for an additional number of days. If rates have fallen since you locked in, you don't get the benefit of that drop. And if they have risen, you get the higher rate -- sort of "heads you win, tails I lose."
If you hate the heads-you-win=tails-I-lose situation, you have another option: the "float-down."
A "float-down" is an option you can add to your rate lock -- at a cost. It allows you to lock in an interest rate today. If, however, rates drop during your escrow, you'd close at the lower rate.
Float-downs don't all have the same parameters, so you'll want to read the fine print. For instance, your agreement might let you re-lock once during your escrow. Another lender might not let you re-lock, but will instead give you a better deal only if rates happen to be lower on the day your lender draws your documents.
Finally, some float-downs only give you the lower rate if it's a certain percent lower than the rate you locked. A .25 percent minimum is common. So, if you lock in 3.75 percent, and your lender is offering 3.625 percent to new borrowers, you won't usually get a lower rate. If you lender is offering new borrowers 3.5 percent, that's at least a .25 percent difference -- you'll get the lower rate.
Mortgage rates today are amazingly low. They had been trending up, and then they fell back down. To get your best rate, contact several lenders and compare. Choose the one with the best deal for you.Click to see today's rates (Oct 20th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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