Mortgage rate-lock tips for refinancing

Posted by  on Jan 24, 2014

Depending on how long ago you bought your home or the last time you refinanced, you may remember deciding with the help of your lender when to lock in your mortgage rate. For those of you who have forgotten, here's a primer on how it works:

Mortgage loan lock basics

·A rate lock commits your lender to a particular interest rate and points for a specific period of time, typically 10, 15, 30, 45, 60 or sometimes even 90 days.

·During that time period, you're protected against rising mortgage rates. However, unless your lender offers (and some do) a "float-down" in case current mortgage rates drop, you won't be able to borrow money at a lower interest rate.

·You won't usually have to pay a fee for a rate-lock, but the lender may charge a slightly higher interest rate (one-eighth to as much as one-half a percentage point) for a longer rate-lock. In other words, if you lock in your loan for the minimum 10 to 15 days, there's likely to be minimal impact on your mortgage rate, but if you opt for 60 days, you'll be paying a higher interest rate until you refinance or sell your home.

·Usually, your lender will require you to lock in your rate at least a week before your closing so that the final loan documents can be prepared for settlement.

·If you're refinancing, your property location and type are already in place, so your mortgage rate will depend on your credit score and your loan-to-value as well as current mortgage rates.

How to decide when to lock in your rate

When you start your refinance application, your lender is likely to provide you with an estimate of when your closing will take place. This timing depends in part on how busy the lender is and on how easy or difficult it is to process your loan in terms of documentation.

Once you have a sense of whether your refinance will close in 30 days or 60 days, you can discuss with your lender the issue of when to lock in your rate. This decision depends in part on your comparison of mortgage rates, educating yourself about predicted mortgage rate trends, and your tolerance for risk. Many borrowers opt to lock in their rate as soon as they have a mortgage loan and terms that meet their needs in order to reduce the risk of a less affordable loan should mortgage rates spike. Other, more risk-tolerant borrowers, are more willing to watch rates and lock in on a day when rates have dipped.

Before you make your decision, ask your lender to tell you what a lock-in will cost in terms of a higher interest rate and if there's a "float-down" option in case mortgage rates drop.

Ask what will happen if you lock in the rate too early and your loan doesn't close on time. Some lenders may extend the lock in that case, particularly if the problem with the closing is their fault and not yours. The more you understand the specifics of your lender's rate lock, the better decision you can make for yourself about when to take the plunge and lock the rate on your mortgage.


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