The Importance of Locking
Your Interest Rate
Make an Informed Decision
Everybody knows that mortgage interest rates can fluctuate several times between the period of filing a loan application and your closing date. As a realtor, I am surprised how many buyers are unaware of the importance of locking in their interest rate when they are about to purchase a real estate property. Here are the facts that you should know to make an informed decision.
What Is a Mortgage Rate Lock?
First thing first, make sure to get multiple mortgage loan offers in order to get the best interest rate offer. Once you find a rate that is a good fit for your budget, you need to make up your mind on whether or not to lock in your rate.
When you receive a mortgage loan offer, the lender will usually ask if you want to lock-in the rate for a period of time or float the rate. If you lock in, the interest rate should be preserved as long as your loan closes before the lock expires.
If you don’t lock it in, your mortgage lender might give you a period of time (30 days or more) to request a lock and/or give you the alternative to wait until you are in contract or until just before closing.
When you discuss the mortgage rate lock with your lender, ask if they currently prioritize applications for a new home mortgage purchase over a refinance. If the answer is no, make sure you get a lock period that’s long enough to cover your mortgage application process. This question is particularly important nowadays because of the historically low rates which have created a backlog of mortgage applications for certain lenders as they are handling too many refinance requests from their clients.
Consequences of Failing to Lock in Your Mortgage Rate
If you don’t lock in your interest rate, rising interest rates could force you to make a higher down-payment or pay points on your closing agreement. Points can be described as an upfront fee to be paid to the lender. Points requires you to spend more money initially in order to get a lower interest rate.
What to Do if Interest Rates Fall After Your Rate Lock
If you locked in your rate early but interest rates are dropping, you might consider withdrawing the current mortgage application and starting a new one. However, there are some risks to this approach. You could lose the money you have already paid to lock your interest rate and you may end up paying for a new loan application.
Some lenders will give you the option to use a mortgage rate “float down” provision. This way, if you’re locked in and the loan rate drops, the float down provision will allow you to change to the lower rate.
In the end, if you feel like you have received the best rate possible and fear a rate increase, consider lock it in now. Be aware that the cost of locking in your interest rate may vary from one lender to another and that each lender has their own unique float down policy and qualification standards.
If you’re willing to gamble that the rate will drop in the coming days or weeks, always check with lenders how long they will give you before you can lock it in and what restrictions might be tied to it.
Hope this Helps.
Source: Forbes Advisor