Right Time To Lock In Interest Rate On A Mortage
Right Time To Lock In Interest Rate On A Mortage
Right Time To Lock In Interest Rate On A Mortage
When it comes to a mortgage for $400,000, the difference in monthly payments between an interest rate of 4 percent and an interest rate of 5 percent is almost $240. That comes out to more than $3,000 per year.
That amount of money would allow you to accomplish a lot of things. And staking your claim to it might be as easy as locking in your mortgage rate as soon as you are ready to make an offer on your home.
If you lock in your rate, however, too soon, you run the risk of losing your choice rate as well as the savings that come along with it. Therefore, it is in your best interest to have a solid understanding of how mortgage rate locks and closing timelines operate.
What Does It Mean to Lock in a Mortgage Rate?
The interest rates on mortgages can be volatile, like a pinball machine. However, the closing process for mortgage loans typically takes around a month, so how can you possibly know at the beginning of the process what your final mortgage rate will be by the time your closing date arrives?
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The mortgage rate lock is here to help.
When you apply for a mortgage, the first thing you have to do is submit a mortgage application form, also known as a 1003 form, along with mountains of paperwork documenting your income, assets, and liabilities, as well as your firstborn child. Your loan application will be reviewed by the lender, who will hopefully grant you mortgage preapproval after doing so.
But this does not mean that you are prepared to take the next step. After all, you are required to include a copy of the mortgage preapproval letter with any purchase offer you make, regardless of whether you are purchasing a new home or an investment property.
However, once you sign a sales contract for real estate, the time begins to run out for you to close the deal. The phrase “time is of the essence” is not merely flowery legalese; rather, it conveys the meaning that the closing must take place by a certain date or the contract (along with your earnest money deposit) will be null and void.
At this point, you should give your loan officer a call and let them know that you are ready to move forward with the process. They will then be able to “lock in” the current mortgage rate for you, ensuring that you will receive that interest rate if you close on the property within a predetermined amount of time. You are required to do the same thing if you are refinancing your current mortgage, even though there may be less of an immediate need to close within a certain timeframe in this scenario.
Locking in interest rates is available for both fixed-rate and adjustable-rate mortgages (ARMs). When it comes to the latter, they decide your initial rate for the beginning of the service.
The Process of Locking in a Mortgage Rate
You will continue to receive the interest rate that was locked in by the loan officer at the time of the transaction, regardless of how much higher interest rates climb between that moment and when you settle.
The inverse is also true, as common sense would dictate. You are still responsible for paying the higher interest rate that was in effect on the date that you locked in your rate, even if interest rates go down.
Unless, of course, you pay extra for a float-down option.
What Does It Mean to Have an Option Float Down?
If you want to protect yourself against the possibility that the interest rate you lock in will go down after you do so, you can pay your lender for a “float-down option.” If interest rates drop after you lock in your rate, you will be able to close your loan at the lower rate that results from the subsequent drop.
However, float-down options come with an additional expense. This cost might come in the form of an upfront fee or higher lender fees when the transaction is finally settled. In the event that the option does not become active, you may be required to pay a higher interest rate.
Before you are eligible to take advantage of a float-down option, interest rates are required to drop by a predetermined minimum amount. For instance, the lending institution might determine that a drop of 25 basis points, or 0.25 percent, constitutes the minimum acceptable distance. You are unable to exercise the float-down option if there is only a 0.2 percent decrease in the rates.
This brings up another important point: it is up to you to exercise your own float-down option. Your lender is not going to offer this information voluntarily. You are responsible for keeping track of the interest rates and must specifically request that your lender redeem your option whenever the rates go down. You only have one chance to take advantage of this option; after that, the rate will return to its regular setting.
Before choosing the float-down option provided by your lender, you should make certain that you have a solid understanding of the particular guidelines and fees associated with it.
Costs to Lock in a Mortgage Rate
The longer you keep your rate locked in, the greater the possibility that there will be fees associated with it.
For instance, your lender may offer a 30-day lock for free, but if you want a 60-day lock, the lender may charge an additional fee that is expressed as a fraction or multiple of a mortgage point. If you want to lock in your interest rate for 90 days, the lender may charge an additional fee. One point is equal to one percent of the total value of the mortgage loan, or $4,000 on a loan of $400,000 as an example. However, depending on the lender, you might get a break and only have to pay a portion of a point rather than the full point.
In the event that you are unable to settle within the allotted time frame for your rate lock, you have the option to extend it, but doing so will typically cost you the same amount. You might be in luck if mortgage rates have fallen since then, but you shouldn’t count on that happening anytime soon.
When Is the Right Time to Lock in an Interest Rate on a Mortgage?
You should lock in your interest rate for your loan as soon as you are ready to move forward with the financing.
You could delay locking in a rate in the hopes that interest rates will go down, but doing so would amount to nothing more than gambling. If you don’t have a crystal ball lying around, your best bet is to just lock in your rate as soon as you’re certain you’re ready to move forward.
Once you have signed the purchase agreement with the seller, you should lock in your interest rate for the purchase loan you are applying for. Since there is no longer a seller involved in the transaction, there is no longer a time crunch associated with the refinancing process. Make a decision about when you want to put down roots, and then work backward from that point.
It is important to keep in mind that you must complete the settlement within the lock period or you risk having to pay a higher interest rate. The settlement of mortgage loans typically takes thirty to sixty days to complete. Check to see that both your loan officer and the underwriting team are working toward a timely closing.
The Step-by-Step Guide to Securing Your Mortgage Rate
You don’t have to “do” anything other than ask for the rate to be locked in because your mortgage broker or lender will do it on your behalf. When you tell your loan officer that you are ready to move forward with the process, they will almost always ask you if you are prepared to lock in a rate at the same time.
After doing research and comparison shopping, you should take advantage of the opportunity to negotiate a lower interest rate before locking in a rate. You also have the option of negotiating a lower interest rate in exchange for the lender charging you higher fees. Within the industry, these are referred to as “discount points.”
Confirm the length of the lock with the loan officer you are working with, and make an effort to get a written commitment from them that they can close within the allotted amount of time. This commitment will not be legally binding; however, it provides you with significantly more leverage in the event that they fall behind schedule due to your involvement.
Questions and Answers Concerning the Mortgage Rate Lock
Even though there isn’t much complexity involved with interest rate locks, first-time homeowners typically have a lot of questions about them. When applying for a mortgage, make sure to keep the following in mind.
Should I Go Ahead and Lock in Today’s Rate for My Mortgage?
It depends. Did you sign a real estate sales contract today? If that’s the case, then you’re right. In the same vein, if you want to refinance your mortgage as quickly as possible, you should definitely lock in a rate as soon as you select a lender and get approved for the loan. You could sit tight and hope that interest rates will drop in the future, but this strategy runs the risk of being counterproductive.
How Long Can You Guarantee Your Interest Rate on a Mortgage?
In most cases, you have the option of locking in your mortgage rate for a period of 15 to 60 days. This includes conforming loans as well as loans that don’t conform to the standard.
The length of your lock period is determined by the policies of the lender as well as the conditions of the market. When mortgage interest rates rise, lock periods may be shortened, whereas they may be lengthened when rates fall.
There is typically no fee associated with shorter lock periods (between 15 and 30 days). Costs tend to increase proportionally with the length of the lock period.
- What Occurs in the Event That My Rate Lock Expires Prior to the Closing?
You can usually ask your lender for an extension on the rate lock if you want one. If you do, however, they may charge you for the privilege, even if it was their fault that the delay occurred in the first place.
If you do not choose to extend the locked rate, you will be subject to the mortgage rates that are available at the time that the lock no longer applies. In other words, your interest rate on the loan will once again start to fluctuate with market conditions. This indicates that you will have a higher monthly loan payment if interest rates continue to climb in the environment in which we find ourselves.
- After I’ve locked in a rate, what happens if those rates go down?
In the event that you decide to go with a float-down option and it becomes active, the terms of that option will dictate a reduction in your interest rate.
If your lock period expires before the loan closes and rates have fallen during that time, you could end up with a lower interest rate when the loan does close, which would result in a lower monthly payment.
In the event that this does not occur, you will complete the closing on your loan at the rate that you locked in, regardless of the market interest rate at the time that your loan completes.
Is it possible to get out of a rate lock on my mortgage?
In a strict sense, yes. You have the option to release a rate lock. But there will be repercussions for it. You’d need to cancel your entire mortgage application. Your application would be effectively discarded by the lender, and you would be required to submit a fresh request for financing. It’s possible that this will require you to pay for an entirely new home appraisal.
This begins the drawn-out loan process all over again, further delaying the date on which you will settle. If you have already made an offer on a house, you are very likely going to default on your sale contract, which means you could end up losing the house to another buyer and having to start your search for a new home all over again.
The Last Word
There are a variety of mortgages available to borrowers, but almost all of them include the option to lock in interest rates. A word of advice: Do not engage in the game of interest rate roulette. When you are ready to move forward with a mortgage, simply lock in a home loan rate, and if absolutely necessary, opt-in for a float-down option. This will ensure that your interest rate does not change. However, in the same way that it is not a good idea to try to time the market when it comes to your investments, it is also not a good idea to try to time interest rates.
As a concluding thought, one strategy that is guaranteed to reduce the interest rate you are charged is to raise your credit score. Even though market interest rates are constantly fluctuating, lenders will almost always charge a lower premium over benchmark rates to borrowers who have excellent credit. Not only does it reduce the amount that you pay each month, but it might also reduce the amount that you pay upfront.
@Opportunities Mail 2022