Should You Lock in a Mortgage Rate?

If you don’t lock, your mortgage rate could change by the time the loan paperwork is finished being processed.

Shopping for a mortgage is kind of like playing the tables at Vegas: there’s skill and luck involved. One mortgage game to play is called “mortgage rate lock.” Before you grab a chair at that table, learn the various situations in which you should — and shouldn’t — lock in a mortgage rate.

What is a mortgage rate lock?

A mortgage rate lock is an agreement you strike with your lender (not your broker) that allows you to hold the current interest rate for a specified number of days. If you don’t lock, your mortgage rate could change by the time the loan paperwork is finished being processed.

And that means your debt-to-income ratio could increase enough that you no longer qualify for your dream home, says Jay Hurst, president of Hurst Lending & Insurance, a full-service Texas-based mortgage lender.

Here’s where your gambling smarts might prove useful.

If you think interest rates will rise … lock. If you think they’ll fall, don’t lock, and let your bet ride. You could also wait for interest rates to fall and then apply for a loan, but you could lose the home you want that way.

Should you lock?

When interest rates are at historic lows, it seems like a no-brainer to lock, and Raleigh, NC, mortgage broker Ryan Fitzgerald emphatically agrees: “Yes! Homeowners should be locking in these rates.”

The rate for a 30-year fixed mortgage in May 2015 was 4.03%. That’s up from the low in November 2012 of 3.31%, but a far cry from about 18% in 1981.

And consider this from Robert R. Johnson, Ph.D., author of Invest with the Fed.

“When the Federal Reserve increases rates — and it is a case of when, not if — mortgage rates will begin to rise. There is much more risk that rates will rise over the next year than they will fall.”

Locking also may give you peace of mind. “Rates are sort of like gas prices,” says Jay Hurst. “They usually drift slowly on the way down but can jump up half a point very quickly.”

There are no sure things

If it feels like a lender might be pushing you into locking, that’s when you need to call their bluff. Maybe it is the right move to make, but remember that the “house” (whether it’s the Vegas casino or your lender) always makes sure it has the upper hand.

You see, locking isn’t free. “The longer the duration of a loan lock, the more it will cost in terms of basis points that are reflected in the mortgage rate,” says mortgage consultant Martin Hess of Nationwide Mortgage.

You might not be charged an upfront fee to lock, but you will be charged a higher interest rate.

Just how much you’ll be charged depends on how long a period you choose. The difference between a 15-day lock and a 60-day lock, for example, could be significant, as much as half a percentage point (50 basis points). On a $ 300,000 loan, that works out to about $ 100 more a month.

Your rate period could expire

The shorter the lock period you take, the riskier the bet. The lock will be cheaper, but the loan process might take longer than your lock period.

“I recommend a mortgage lock of 45 days because that’s a realistic assessment of how long it will take to close a loan from the moment the application process begins,” says Hess.

If the lock does expire before the closing is finished, all is not lost.

“A borrower typically will get one extension to relock a loan for another duration period,” says Hess. But the lender will typically reflect the extension by increasing the interest rate.

A “float-down option” is another route. “If rates happen to fall significantly after you lock in your rate, this gives you a one-time opportunity to lower your rate,” says Colin Robertson, a mortgage lending expert. You might be charged to do this, but not always.

Or you could simply try to renegotiate your rate with your lender. Some lenders might agree to new terms to keep your business, says Robertson.

When to leave the table

If you locked and mortgage rates went down, you lose. You can back out of the deal, but it’ll usually cost you; the lender might charge you a cancellation fee.

Make sure you’re educated on the risk and reward so that you can make an informed decision — instead of rolling the dice and simply hoping for the best.

Trulia’s Blog

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