What is an interest rate lock?
An interest rate lock is a mechanism that guarantees your selected interest rate will be applied to your mortgage. Unless your rate is locked, your interest rate is unprotected and can change daily, sometimes throughout the day until you instruct your lender to lock you in.
When is the best time to lock?
There’s no hard and fast answer for this question. Interest rates change constantly, and trying to time the market is nearly impossible. What is most crucial is that you and your loan officer are confident that your loan will be able to close within the time frame of your lock period.
There are no general lock regulations that lenders must follow but there are common guidelines most lenders adhere to:
• The loan application must be received and reviewed by the lender
• The loan application has been documented and verified
• The loan application meets the criteria set for the rate
If an interest rate requires a credit score of 740 with a minimum of five percent down the lender will need to have your application, your credit report and all documentation required for the loan. This also means your appraisal must be completed and reviewed by the lender.
Some lenders may allow a lock prior to this documentation review but if any of the information on the application is found to be in error and does not match the original application the lender is under no obligation to honor your lock.
You’re In Control:
A mortgage company will not lock in your mortgage rate until you instruct them to do so. Regardless of any advertised rate you see or the rate quote you receive from the lender until you give specific instructions to lock your rate will be unprotected.
Most lenders issue a Lock Agreement at the time of the original loan application for you to review, spelling out their own lock in requirements. Lenders will ask that you review the document, sign and return to them, keeping a copy for yourself.
Some lenders have a “float down” policy which allows a borrower to lock in a lower rate should interest rates drop after the rate was locked in, but those programs are not common. If a float down program is available, it will likely have an associated cost.
It’s also important to remember that interest rates can affect your ability to qualify for a mortgage. When rates are higher borrowers can qualify for less and when rates are lower borrowers can qualify for a larger loan amount. This is important if you are just barely qualifying for the amount requested. For example, if interest rates today are at 4.00 percent and you are approved, barely, then you should strongly consider locking in your rate. Your lender will be able to tell you at how high rates can be before you’re no longer qualified.
A rate lock is a way of shifting interest rate risk from the borrower to the lender. In order to compensate for the risk, the lender will charge more for a rate lock as the length of the lock period increases.
Lenders can increase the price of a longer term lock by adjusting the points paid or adjusting the interest rate offered.
When interest rate locks expire, or are “blown,” most policies dictate that you will take the higher of your initial locked rate or current market rates. This keeps borrowers from allowing their rates to expire in an attempt to obtain the new, lower rates.
Deciding when to lock can keep you up at night. After all, if you lock and rates move down then you’ve lost the lower rate. On the other hand, if you lock and rates move up, you’re protected. Now ask yourself this question: if you were to lock and you locked at the wrong time, which way would you rather be wrong? The prudent answer is locking then rates moving downward. If you lock and rates move upward, you made a good choice. If you don’t lock and rates move upward, you may no longer qualify for the mortgage.
When is the ideal time to lock in a rate for a purchase? No one can anticipate what rates will do in the future. But to obtain the best possible outcome make sure you’re in a position to lock, based upon your lenders lock guidelines. Get your documentation to your lender as soon as you can and understand in advance at what point you’re able to lock. Choosing a loan program and locking in your interest rate are two of the most important decisions you can make with your loan. Make the right ones. Lock it right.