So you've done all your research, called at least three
different lenders to get their mortgage interest rates and costs,
and you've made the decision to pick the one that will give you
the best rate, at the lowest costs, with the least hassle -- no
small feat these days.
There's one more decision to make, and it's a big one: Should
you lock in your rate?
Many customers, especially first time home-buyers, are
surprised to learn that interest rates can change minute by
minute, hour by hour, day by day. They may assume that the rate
they are quoted is guaranteed. Just like the price of a stock
constantly changes until you make the decision to buy it,
mortgage interest rates always move with the markets.
The only way to "buy" an interest rate and the costs that go
along with it is to request a lock-in, which will guarantee a
certain interest rate for a limited period of time. As always in
the real-estate industry, it's important that you get something
in writing verifying how long that rate and price are guaranteed
for (it will be 30 to 60 days for a normal purchase or
Since May 2013, we have seen some volatile trading in the
markets that most directly affect mortgage lending rates: the MBS
and the Treasury Bond market. That has translated to single-day
movements of as much as 1%. The graph below from Mortgage News
Daily shows this volatility.
If you called for a rate and price quote around the
beginning of May 2013, and you didn't lock your $200,000
loan by the end of that month, then the overall cost of that
rate went up by about $2,000.
So what should you do to make sure your rate, or the costs
that go along with it, don't go up? It's simple: Lock in the
If rates drop after you've locked yours in, do you get the
new, lower rate? Well, think of it this way: If you buy a stock
and it plunges in value the very next day, do you get to ask for
a refund so you can repurchase those shares at their reduced
The answer, clearly, is no. You made the call based on your
best research, and the purchase is final. The same is true of
locking in a loan.
If you allow the rate to float -- i.e., to fluctuate with the
market -- it
come down if interest rates decline, but once you commit to
locking, that's the rate you should expect at closing. Locking a
rate in is the only way to guarantee you won't pay more if the
Floating your interest rate may not cost you that much if
things go bad. Most daily rate movements won't translate to more
than 0.25% in cost on your rate, so on that same $200,000 loan,
that gamble is not likely to hit your wallet for more than $500.
However, floating your interest rate presents other potential
For one, if you're buying a house, you have a contract closing
date that can't be moved simply because you're holding out for
the lowest possible rate or you got stuck with a higher rate
while playing "mortgage interest rate roulette."
And there's another big risk in floating your rate while house
hunting: A sudden spike in rates could turn an approval into a
denial if the payment rises enough to push your debt-to-income
ratio -- i.e., your monthly debt payments divided by your gross
monthly income -- past 43%. With the newest round of regulatory
reform imposing much more strict tests of your ability to repay,
gambling on a rate has more consequences than it used to. And
this past year, mortgage rates have always spiked faster than
If you're refinancing, once you hit your cost-benefit target,
lock it in. Refinance markets are much more sensitive to
sudden spikes than purchase markets. Usually the only reason
you're applying for a refinance mortgage is to get the lower
rate. Once they rise, there's really no benefit to making the
application. When you see news that rates are at all-time lows,
beware: The news tends to lag the current available rates by a
week or two. By the time you jump into the process, things could
well be on the verge of changing.
It's not a bad idea to ask the mortgage professional you're
working with if they have a strategy for locking in your loan.
Even more important, if you have requested that your loan be
locked in, be sure to ask when you'll receive your rate lock
letter and final cost estimate, which gives you the date your
lock expires. If you don't get it in writing, then you don't have
anything binding to guarantee that the price and rate were in
fact locked in. It is common practice now for a customer to
receive a lock letter that confirms the interest rate, the costs,
and the expiration date of that lock-in.
Make sure you get all necessary paperwork to your loan officer
long before that expiration date; it costs money to extend a
lock, and that cost is usually paid by you if documents aren't
coming in fast enough to finish up the loan.
Like any other financial decision, locking involves deciding
how much risk you are willing to take about the direction of
rates. If you like playing the odds at the roulette wheel, then
keep your rate in a floating (unlocked) status. If you're the
type who prefers to watch the game and enjoy the free drinks,
then you should lock in your interest rate.
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