When Should I lock my Interest Rate When Buying a Home?

how to lock in the lowest mortgage rate available when buying a home.

When you buy a home and get a mortgage, you will also need to decide when to lock in your mortgage interest rate. Because of the risks of a dramatic interest rate change after you sign contracts to buy a home but before you close on your purchase, our recommendation is always to lock in the best rate available as soon as you have signed contracts and have established a closing date.

With mortgage interest rates staying low and home prices down, many first time home buyers are coming back into the market.

Submitting your loan application does not necessarily lock in your rate. Borrowers must specifically request that the lender lock their mortgage rate. All borrowers are advised to get their mortgage rate lock in writing.

In the same way people try to time the stock market - deciding when to buy and sell stock in companies - many borrowers try to time when they lock in their mortgage rate when they buy a home by locking sometime between the contract signing date and the closing. Based on the history of mortgage interest rates, this strategy usually backfires and gambling can cost home buyers a lot of money and possibly cause them to lose their contract deposit and the home they wanted to buy.

Past mortgage rate behavior

If you look at a history of mortgage rates since 1980, you will find the same pattern: mortgage rates tend to decrease very slowly, lulling borrowers into the feeling that rates will stay low for long periods. But when rates increase, they tend to spike up extremely quickly - often in hours. By the time you find out that interest rates are increasing, it is already too late to lock your rate at the lower rates from yesterday.

When you are buying a home with a mortgage, you sign a contract with the seller of the property you are buying promising to close on a certain date. While dates can be somewhat flexible (e.g. most contracts allow for buyers to close within a week without penalty), buyers can be at risk of losing their contract deposit if they do not close on their home after their loan is approved. Sellers do not care if you chose not to lock your interest rate and rates went up.

Most sales contracts include a contingency that states that the buyers can cancel the contract if they are not approved for their loan. Most of these contingencies also include language that the borrower must be able to obtain financing for a 30 year term and at a specific interest rate. In most cases, the specific interest rate clause is changed to "prevailing rate."

What does this mean for home buyers?

If a buyer contracts to buy a home with a mortgage contingency at the prevailing rate, the following scenario can occur:

1. The buyer signs a "prevailing rate" mortgage contingency contract
2. The buyer pays a deposit.
3. The buyer applies for a loan but does not lock in an interest rate
4. The buyer is approved for their loan at today's low rates
5. The buyer releases the mortgage contingency with the seller.
6. Interest rates spike up from 5% to 7.5% and one of the following happens:
• The buyer is stuck with a 7.5% rate.
• Even worse: You find out that your loan approval was only good up to a rate of 6% (because the payments are higher) and your loan is denied. You end up defaulting on your contract because you cannot close your loan and losing your deposit.

To avoid suffering the fate of these home buyers, follow this simple advice: As soon as you have a signed contract with a closing date, lock your mortgage rate immediately. Do not try to play the market during the brief 30 to 90 days between your contract signing and your closing. The chances that mortgage rates will be at an all-time low exactly at the time period when you are buying your home is slim to none. You can always refinance any time six months after you close on your loan, so why take a chance?

Consumer Checklist for Mortgage Rate Lock-Ins

1. 1. Get all rate locks in writing or by e-mail. Make sure the rate lock shows the loan program, the interest rate and the total points if any on the loan. For adjustable rate loans, make sure all index, margin and cap information is included.
2. Make sure the lock-in is from the actual lender if you are using a mortgage broker.
3. Anything that is too good to be true is! If one lender seems much lower than all the others, approach with caution and get it in writing.
4. If lock-in fees are required, get written confirmation of how those fees will be refunded or credited at closing.

For an exact mortgage rate quote and a free purchase mortgage pre-approval using gift funds, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

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