“Do you think we should lock-in our rate today?” This is perhaps the number one question asked of mortgage originators, and the hardest to answer. Hard to answer because there are a number of factors that go into locking in an interest rate. Also hard because 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?”
What Are The Requirements of the Lender?
Mortgage lenders differ on when you can lock-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. Some require that an appraisal has been paid for and ordered. For refinance mortgages a completed appraisal may be required. 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 rate, or will you need to wait?
How Long To Lock-In?
If you have been working the Prequalification Calculators to determine your purchase price, looked at homes 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 thirty-four days then you should not lock-in your mortgage rate for thirty days. Most rate locks are in fifteen day increments, typically a 45 day lock is slightly more expensive than a 30 day lock.
What If Rates Drop After I Lock-In?
A rate lock-in 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, 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.
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? 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 pay-off demand? What if we cannot close within in the time frame of our rate lock?
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 when you can.
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.
