When is the Most Favorable Time to Lock in Your Home Loan Interest Rate?
As you get ready to apply for your home loan, you may be wondering about mortgage interest rates. The interest rate you get on your home loan will differ according to current rates, loan types, loan terms, credit rating, and will determine your monthly payment on the loan. At some point during your home loan process you will need to lock in your interest rate.
What does it mean to lock in the rate and how do you know when it is the most favorable time to do it?
Here are the basics of what you need to know:
Mortgage Interest Rates
The interest rate is the rate charged for you to borrow the principal loan amount to purchase your home. It can be fixed or adjustable, depending on what type of loan program you choose. The annual percentage rate (APR), different than the interest rate, is the cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees.
Interest rates for mortgages can fluctuate and are impacted by economic data, inflationary pressure, the stock market, the Federal Reserve, geo-politics and other global events. Because of the fluctuations during your loan process, the rate could impact your monthly payment amount, making it higher or lower. This is why you typically lock in your interest rate a couple of weeks before the loan closing. But there may be reasons to lock in sooner or later.
Borrowers may have the following misconceptions about locking in rates:
If interest rates go lower after locking, I can get the lower rate with the same lender.
That is not necessarily true. Once the borrower locks in the rate, the lender simultaneously locks in that amount of money at that rate within the mortgage-backed security market. If the rates go higher you’re safe, but that doesn’t mean you automatically get a lower rate if rates go down. Some lenders offer a float-down option for a fee, to take advantage of rates dropping. Consider APM’s SecureLock program which allows you to lock in a rate early and includes the float-down option so you can move forward with confidence and take advantage of more favorable rates.
I’ll skip the rate lock and save costs, hoping for a good rate at closing.
The benefits of locking in the rate usually outweigh the gamble of waiting until the end. If rates jump up or your situation changes, giving you a higher rate for the loan, you will pay more in monthly payments or could even end up not qualifying for the loan if the rate jumps too much. Though there is always some risk, locking in a rate can bring peace of mind.
You do not need to be an expert on rate locks - at APM, our loan advisors are licensed professionals who watch the market closely every day so you don’t have to. They can’t guarantee the perfect time to lock, but they can give excellent advice as to when is a good time to lock according to your circumstances.
When is a Good Time to Lock Your Rate?
The time to lock in your rate will depend on your circumstances - there is no one perfect answer. You should work closely with your lender to make that decision. Be aware that interest rates may change because they are tied to the mortgage-backed security market, which can be just as volatile as the stock market.
APM offers our SecureLock program that allows buyers to lock in today’s rates while they look for a home, sell their home, or while a home is under construction. It includes a float down option as well. Our loan advisors can help you determine if this program is right for you and if you qualify.
What is the Rate Lock Timeframe?
There are several options for rate lock timeframes. These include 30, 45, 60 or 90-day options. With the recent addition of Know before You Owe in October of 2015, there are more documentation review timeframes and requirements that have to be met along the way. Borrowers can’t lock in a rate and close three days later, for example.
As a general guideline, you’ll want to have your rate locked in at least 15 days before the final closing date of your loan.
The most favorable pricing for any given rate is generally when you are within the 30-day timeframe. If you lock in your rate 31 days before your close date, technically you’d be in the 45-day lock commitment. The longer period you have, the higher the rate will be. A 45-day lock commitment carries a higher cost than a 30-day lock commitment, for example.
Therefore, from a cost perspective, it generally makes sense to hold off until you are within the shorter lock-in period. An exception may be if your home is under construction. Then you may consider a 90-day lock if you believe rates are going to go up.
What Happens if the Rate Lock Expires?
If your rate lock expires, it is possible that you may be able to extend the lock through the lender for a fee. If an extension is not possible, you would pay the current market rate, which could be higher. To avoid this situation, we encourage you to work closely with your loan advisor to ensure all documents are submitted in a timely manner. Being responsive and communicating regularly with your loan advisor is critical to keeping the loan process on track.
Understanding interest rates and rate locks can help you better prepare for your homeownership journey. APM is happy to help simplify the process. Contact one of our loan advisors today to prepare for your loan process - we’re here for you!