Many people ask their loan officers, "When should I lock in my rate?" There's no easy answer. It's a little like asking when you should sell your stock or which mutual fund will perform better. It all depends on the market and your individual situation.
Are you a well-qualified buyer? If you believe that rates are going to stabilize or improve, it might make sense to wait to lock in your interest rate. However, less qualified buyers need to keep in mind that rising interest rates may impact their ability to qualify for a mortgage. If you think you're going to be close to the maximum permissible debt-to-income ratio, it might make sense to lock your rate regardless of projected decreases in interest rates. Sound complicated? Your loan officer can help you understand how much home you can afford at today's rates and help you better understand the risks and rewards of locking your interest rate or letting it float.
Interest rate lock basics
When a loan's interest rate, points, fees and rate lock expiration date are agreed upon by the borrower and lender, the loan is considered "locked." Before the program and terms are "locked," the loan is considered to be "floating," at which time the homebuyer's rate can be affected negatively or positively by market shifts.
Once your loan is locked, if the market shifts and rates rise—even before you close—your interest rate will not increase. That being said, you will still end up with the rate you agreed upon should interest rates drop.
What to keep in mind
The best advice is to keep an eye on interest rate movements in the weeks and months before you plan to secure a mortgage. Have rates been generally rising or falling? When experts are predicting interest rate hikes in the coming days, you may choose to lock sooner. Or, if rates are steadily dropping, you may choose to wait until the last moment. There's no way to guarantee which way rates will shift, but staying in tune with the market will help you make an educated choice. Of course, as mentioned before, less qualified borrowers may not have the luxury of waiting for potential decreases and may want to lock in a rate while they can!
Depending on what your lender has available, you may be able to consider a float down option. With a float down, you lock in your interest rate, but are allowed to "float down" to a lower rate one time before you close if rates decrease. There is usually a non-refundable up-front fee associated with a float down option.
Still not sure what to do? The decision to lock is ultimately a personal one, but consult your loan officer to discuss the lock options associated with your loan. Our affiliate, HomeAmerican Mortgage Corporation, would be happy to walk you through your choices. Call 866-400-7126 today.