When to lock your loan.
When to "Lock" Your Mortgage Rate
Shopping for a mortgage? If so, you're probably watching interest rates daily - wondering just how they may change when you're ready to close on your new loan.
Your monthly mortgage payment depends in part on your interest rate. The rate on your loan isn't necessarily set when you apply for a mortgage. Until you explicitly "lock" in your loan pricing, the rate on your pending loan will "float" with financial market conditions. Your monthly payment may end up being higher than it would have been under the conditions that prevailed when you applied for the loan. It may also affect how much you can borrow.
When should I lock?
If you believe that financial market fluctuations will lead to higher rates before you close on your house - or you simply want to avoid that risk - you should consider locking as soon as you've made your application. The downside is that, if financial markets push rates lower, you may miss out on a getting a lower rate and a lower monthly payment. However, we are positioned to float your rate down if market conditions become more favorable up to 60 days prior to settlement.
When you lock:
- Your loan pricing is protected from changes in financial market conditions.
- Your final rate will reflect the pricing that was available at the time you locked in for loans with your specific transaction characteristics (points paid, loan-to-value, etc.) and your credit profile.
- Any lock past 90 days may require a fee of .25% of loan amount. In most cases this is non-refundable.
- You can lock anytime after signing you contract, up until five business days before the closing.
- Based on project completion, you can have a hard lock for up to 12 months, or lock with a program that caps the rate for as long as 18 months.
When should I float?
On the other hand, if you believe that financial markets will push rates lower between the time you apply and the time you close, you might consider floating the rate. You may be rewarded with a lower mortgage rate and a lower monthly payment. Of course, you would be risking a higher rate and a higher monthly payment if market rates rise before you lock.
An important criterion for the lender when approving a loan application is the borrower's ability to make the mortgage payments. If rates rise, the resulting higher payment could negatively affect loan approval, and you could be asked to consider other financing alternatives to gain approval (a higher down payment, for example, to lower your monthly payment). So, if you're thinking about floating, you also should consider how much rates would have to rise before they affect your ability to qualify under your desired loan terms.
When you float the rate:
- You can take advantage of falling rates before you close on your loan. Lower rates mean lower monthly payments.
- You are not tied to a specific rate.
- You can switch from floating your rate to locking it in anytime after applying and at least five business days before closing.
