When to Lock In Your Mortgage Interest Rate?

Posted by  on Oct 08, 2009

Locking a mortgage rate is a decision that makes borrowers tear their hair out. Rates were better today, but if you lock and they get even better tomorrow will you feel stupid? Or if you choose to float (not lock) your rate, and they increase, is your loan approval in jeopardy? Calling your lender for mortgage rate quotes every day and unable to make up your mind? Relax. Your decision depends on a number of factors and this article will address them right now.

What IS a Rate Lock, Anyway?

An interest rate lock is your lender's commitment to lend to you at an agreed interest rate and price, and is in force for a specified time (generally, the longer ahead you lock your rate, the more it costs to do so). Until you have an actual lock confirmation in writing, you don't necessarily have a locked loan. Your rate can be locked even if you don't have a loan approval yet, but you do need to have a property. If buying, you can't lock a rate before you have an accepted offer on a specific address.

So How Do You Lock in the Best Interest Rate Possible?

You can't "know" for certain that you are getting the lowest mortgage rate possible. Mortgage rates move with financial markets and your average interest rate quote is good for about three or four hours. If you want to add certainty to the process, you can pay a fee for a "float down." This is an interest rate lock that secures you today's rate when you lock in, but you will be given a lower rate if mortgage rates have improved when you close your loan. For some, especially if they are locking far in advance, this added certainty is worth the fee the lender will charge.

Your Mortgage Interest Rate: Get It While It's Good and Stop Worrying

In general, if you are purchasing a property and the rate offered looks good, go ahead and lock it in. Then stop thinking about it. This is especially important if your income barely qualifies you for your loan and a rate increase could stop your approval.

But Don't Lock Your Rate Prematurely

There are several reasons NOT to lock an interest rate. First, if you are refinancing and have a target rate for the deal to make sense, stand your ground. Wait for the right interest rate that will make your refinance pay for itself and generate some savings. If you really like the challenge of following the markets and enjoy a little gambling, floating your rate could provide a couple of dividends--first, a 30-day interest rate lock typically costs about a quarter point in fees (60 days costs about a half point), which you could save by floating or going with a 7 or 15 day lock. Second, there is always the chance that rates could drop and you could end up ahead--just determine upfront if you can stomach the ride and deal with it if the market doesn't go your way.

Interest Rate Lock Recommendations are provided daily on this site for those who enjoy rate-watching and seeing if they can score a better deal. Just keep in mind that lenders are as risk-averse as anyone and that rates will always increase more sharply and quickly than they decrease in a volatile market.


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