For Best Mortgage Interest Rates, Know When to Lock Your Loan

Posted by  on Jan 25, 2010

When you apply for a mortgage, you have a choice to make about your interest rate--you can lock it in immediately, let it float until you close on your loan, or choose a float-down, which allows you to lock and then close at a better rate if interest rates drop. Naturally, float-downs cost money.

Mortgage Interest Rates Change Every Day

Mortgage interest rates are subject to the same fluctuation as other financial markets. Stock prices and bond yields change all day, and so do mortgage interest rates, which are driven by the prices of mortgage-backed securities (MBS). MBS prices constantly change but, in general, trade within a range--they are what traders call "range-bound." So, if you want to play the floating game in hopes of getting a better interest rate before closing, it's better to finally lock in when rates are at the low end of their range: that is, when MBS prices are on the high side of their range. Shoprate.com's daily lock advisory can tell you where MBS are trading that day and what economic news is likely to drive rates and pricing.

The Earlier You Lock, the More it Costs

Mortgage lenders offer several quotes for the same rate, depending on how far ahead of closing you want to lock your loan--from 10 days to 120 days. In general, the further ahead you lock your rate, the more it costs--the rate with a 120-day lock can be a full percent higher than the 10-day rate. Once you are locked, if rates improve, you would have to pay more to get the better interest rate. Conversely, if rates get worse, you are protected.

Mortgage Interest Rates Increase Much Faster than They Drop

Bad news on the MBS market translates to fearful and swift reaction by traders and lenders. You may not have time to lock in your loan if bad economic news hits the wire--and you could find yourself with a much higher rate almost instantly.

Locking Protects Your Approval

If your loan approval depends on you getting a certain interest rate--for example, if your debt-to-income ratios are barely approvable at 5%--do you really want to wait around for 4.75%? You could just as easily end up with 5.25% and no loan approval.

Locking Your Loan Seals the Deal

Until you have a locked loan, all you have is a pile of disclosures that are about as substantial as air. Without a lock, there is no obligation on the lender's part to give you a specific rate at a guaranteed price--and there couldn't be, because rates change all the time. But once you lock in, the lender secures the funds for you, and that costs money. At this point, both you and the lender have a commitment to each other.


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