Mortgage rates matter. Regardless of how much you borrow, a loan with a higher interest rate will cost you more over its lifetime than a loan with a lower interest rate. Obviously, prospective homeowners should be very interested in getting the best interest rate possible for their home loans. A mortgage rate lock can be an important tool in your quest to obtain the best possible interest rate. How do you know when to lock in a mortgage rate?
Understanding When to Lock in a Mortgage Rate
Interest rates fluctuate quickly, but the mortgage application process takes time. As a result, the rate that was available when you put in your loan application is likely to be different than the one in effect weeks later when you receive word of your approval. Likewise, it’s not unusual for rates to change in the time that passes between the approval of a loan and the actual transfer of property during the closing. That’s where mortgage rate locks come in. As Investopedia explains, a mortgage rate lock is a guarantee from a lender that a borrower will get a specific interest rate on a mortgage. It’s important to note that mortgage rate locks aren’t indefinite. They are for a specific period of time.
What Does a Mortgage Rate Lock Cost?
According to Zillow, some mortgage rate locks are free; others have a price tag. Generally short-term locks are fairly inexpensive. Because they present a greater risk for lenders, long-term locks tend to be pricier. Some lenders charge a flat fee for a mortgage rate lock. Others require a percentage of the mortgage amount or roll the cost into the purchased rate.
How Long Do Mortgage Rate Locks Last?
If mortgage locks are agreements that lock in rates for a specific duration, how long do they last? This depends. Bankrate reports that most lenders offer rate lock periods of 30, 45, 60, or 90 days. When can you secure a mortgage rate lock? This varies from lender to lender, but there are generally multiple opportunities during the mortgage process. Since rate locks do expire, you’ll want to think carefully about when you should lock in a mortgage rate.
How Do You Know When to Lock in a Mortgage Rate?
How will you know when to lock in a mortgage rate? There’s no easy answer. It largely depends on your individual circumstances. However, realtor.com advises that you may want to lock in your mortgage rate if any of the following situations apply:
- You have a contract to buy a home. Your offer for your dream home has been accepted, and you have a contract. If you expect to close in the next few weeks, it can make sense to go ahead and lock in your mortgage rate so that you know exactly what to expect as you complete your home purchase.
- You are near your financial limits. Experts often discourage people from borrowing the most that a lender will agree to lend them, but if purchasing your dream home has you near that threshold, you may want to lock in your mortgage rate sooner rather than later. If interest rates rise, it could push up your monthly payments to an unaffordable level or raise the total cost of your loan enough that the lender decides that you no longer qualify.
- Interest rates are going up. Interest rates can be tough to predict, but if the trends indicate that rates are on the rise, then it might make sense to lock in your rate before rates climb any higher.
- Interest rates are volatile. When interest rates are swinging wildly between increases and decreases, it can be prudent to lock in a rate so that you’ll have the security of some stability.
What Should a Mortgage Lock Contract Include?
Securing a mortgage involves a lot of paperwork, and trying to keep track of everything can certainly be overwhelming, but it is always wise to understand what you are signing. What should you expect to see in a mortgage lock contract? According to Nolo, the agreement should include all the pertinent details, including all the terms that you’ve locked in and the cost of the rate lock. The date and time that the rate lock goes into effect, the date and time that the rate lock expires, and any post-lock options should also be spelled out.
What if Interest Rates Change?
If interest rates rise during your lock-in period, you’ll still pay the lower rate; that’s the purpose of using a rate lock. However, interest rates can also fall. What happens if interest rates fall during your lock-in period? As Zillow explains, this depends. You may have to pay the rate that you locked in, even though it’s higher. However, if you hedged your bets by getting a float-down provision in your rate lock contract, you might have a one-time chance to shift to the lower rate. Alternately, you might be able to secure the lower interest rate for a fee; your options will depend on the exact nature of your float-down provision.
When it comes to deciding when to lock in a mortgage rate, pinpointing the perfect moment isn’t easy. It is often helpful to discuss the matter with a mortgage professional who can review your unique situation and educate you about your options. If you want to secure a mortgage and learn more about locking in a mortgage rate, contact PrimeLending if you live in the Kansas City area. Our committed team will help you navigate the home hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes. We’re more than happy to navigate you through the process of buying your first home. When you’re ready to learn more, please give us a call at 844-701-5626.