When you’re buying a home, mortgage rates matter immensely. After all, securing a home loan with a lower interest rate can save you thousands of dollars over your loan’s lifetime. If you’re preparing to buy a home, you’ll definitely want to give some thought to the movement of mortgage rates, how mortgage rate locks work, and when to lock in a mortgage rate.
When to Lock in a Mortgage Rate
Mortgage rates are continually shifting up and down. As CNBC explains, lenders look at numerous factors when setting interest rates, including movements related to U.S. Treasury bonds and mortgage-backed securities. Predicting whether interest rates for home loans will rise or fall from one day to the next is as challenging as forecasting the stock market’s behavior on any given day, so the stability of a mortgage rate lock can be appealing.
How Mortgage Rate Locks Work
As NerdWallet reports, a mortgage rate lock is basically an offer from a lender that guarantees you’ll get a certain interest rate for your loan for a specific period of time. Locking in your rate means that if rates rise, you’ll get to keep the lower rate. However, this feature cuts both ways – if rates fall, you’ll still be stuck with your higher interest rate.
To balance this concern, you can go with a rate lock that includes a float-down provision. With this provision, you’ll get one chance to switch to the lower rate if interest rates fall below your locked rate. If you decide to use a mortgage rate lock, read up on the details. Rate locks typically last for 30 or 60 days. They can be free or come with a price tag, and adding a float-down provision to your rate lock may cost extra.
When to Lock in Your Mortgage Rate
How do you know whether to float your mortgage rate or lock it in? Realtor.com advises that you consider locking in your mortgage rate in the following scenarios:
- You’re in a contract. If you’re in a contract and heading to closing soon, locking in your rate can provide peace of mind.
- You’re in danger of not qualifying for your loan. When you’re borrowing an amount that is close to the upper limits of what you can get approved for, locking your rate can prevent nasty surprises and keep your deal viable. Without a lock, rising interest rates could push your monthly mortgage payment too high or force you to come up with a higher down payment.
- Interest rates are climbing. If rates are going up, it makes sense to lock yours in before rates climb higher.
- Interest rates are volatile. When rates are slowly shifting in a predictable direction, you may feel comfortable watching and waiting. However, when rates are bouncing up and down, the swings tend to be bigger and harder to judge. In times like this, locking in your rate can shield your finances (and your nerves) from this volatility.
When Not to Lock in Your Mortgage Rate
When should you hesitate to lock in your mortgage rate? According to Interest.com, knowing when to lock in your mortgage rate is often a matter of timing. Locking in a rate too early in the homebuying process sets the stage for your rate lock to expire before closing. If this occurs, you’ll need to pay extra for an extension or take the risk of floating your rate. You should also wait to lock in your rate until you’re sure that your financial situation is stable and the type of loan you’re using is confirmed. Any change in your finances or loan type can void the lock, so there’s no point in negotiating a mortgage rate lock until those things are in order.
If you have questions about when to lock in a mortgage rate, how the loan approval process works, what happens at closing, or which loan product is a good match for your situation, turn to the experts at PrimeLending of Denver. How can we help you? To find out, contact us today.