How To Time Locking In Your Mortgage Rate

July 13th, 2010

“Do you think we should lock in our mortgage rate today?” This is perhaps the number one question asked of mortgage originators — and certainly the hardest to answer. There are a number of factors that go into locking in an interest rate. It is your mortgage and your mortgage payment, and ultimately you must make the decision. So when do you decide to lock in the mortgage rate you have been plugging into the mortgage calculators?

Here are some keys to helping you with your decision, “Should I lock in my mortgage rate today?”

5 Tips For Mortgage Rate Lock Timing

1. What Are The Lender’s Requirements?

Mortgage lenders differ on their timing for locking in the rate and terms of your mortgage application; usually, the receipt of a signed application package signifying your intent to proceed with the mortgage application is the earliest opportunity. Some require the appraisal to be paid for and ordered, or even completed in the case of many refinance mortgages.

When applying for your mortgage, determine upfront what the requirements are to lock in your refinance or purchase mortgage. Can you take advantage of today’s mortgage rates, or will you need to wait?

2. How Long To Lock In?

If you have been looking at homes, working the Prequalification Calculators to determine your purchase price, and finally have entered into a contract to purchase your new home, you may be anxious to lock in your mortgage rate. Before locking, you need to ensure that you lock in the mortgage rate for a sufficient amount of time that extends to, or beyond, your agreed upon closing date. If you are scheduled to close your transaction in 34 days then you should not lock in your mortgage rate for 30 days. Most rate locks are in 15 day increments, typically a 45 day lock is slightly more expensive than a 30 day lock.

3. What If Rates Drop After I Lock In?

A rate lock protects you against an increase in mortgage rates. But what if the market improves and rates drop after you have locked in your mortgage rate and terms?

Most lenders have in place what is known as a “float-down policy.” Float-down policies allow borrowers to lower, or float down, their locked in mortgage rate if certain conditions exist. Generally the float down rate will not bring you all the way to the current market rate, but will be a compromise between the locked-in interest rate and the lower rates then available. When asking about the lock-in policy with your lender also inquire as to their float down policy.

4. What If I Cannot Close In Time?

You have determined with the refinance calculator that a certain rate will provide you with the savings in your monthly mortgage payment to meet your objectives. You apply for your mortgage and lock in the mortgage rate. Then circumstances beyond your control, or in your control if you have not been able to provide required documentation, has your mortgage lock at risk as it appears you will go past the commitment, or lock, date. What happens then?

When you inquire about your lender’s lock-in policy and float down policy, also ask about the “extension” policy. What if we need more time to close our purchase mortgage because the seller is not ready to close before our mortgage rate lock expires? What if our refinance closing has been delayed because the holder or our second mortgage has not completed the payoff demand? What if we cannot close within in the time frame of our rate lock?

5. When Should I Lock In?

The Golden Question. Historically low mortgage rates do not last forever. You have done your homework with the mortgage calculators, applied for your mortgage and now want to know if you should lock in your mortgage or wait in case rates drop lower. Ask yourself some questions. First, how much lower do you feel mortgage rates can drop? Second, how much money are you saving in your monthly mortgage payment if the mortgage rates drop a little more in rate or fee? Third, have you met your objective you set out to achieve when you initiated your application?

A rule of thumb for mortgage rates is rates go up faster than they go down. So if you are floating your mortgage rate waiting for a lower rate, you can lose the rate you have today very quickly with one bad day in the market.

For over twenty years this philosophy has worked well as to when to lock in a mortgage rate: If you can lock in your mortgage rate through the period of time needed to close your transaction at a rate and cost that meets your objectives and for which you qualify for then you probably should lock in your mortgage. Usually if the market drops significantly you will be able to negotiate for a lower rate. But if the rate goes up you are protected. Don’t gamble with your house payment: Lock in your rate as soon as you can.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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