If you were to think of the one thing you worry about most with a new mortgage, what is it? Did you say interest rate? You aren’t alone. Many Americans worry about rising interest rates and how it affects their mortgage. Luckily, you have options when you take out a new mortgage. Whether you buy a home or refinance an existing mortgage, you can lock your mortgage rate. Now the big question is, when is the best time to do so? What is the magical timeframe?
We take a look at your options here.
The Typical Lock Period
First, you should understand the typical lock periods. Generally you have the option of 30, 45, 60, or 90 days. That is a lot of options! How do you know what is right for you? Some lenders even often different periods. This complicates matters even more.
The longer you lock a rate, the more you pay. But, you pay in different ways. For example, a 30-day period on a 4.5% rate may be available for 0 points. This means the rate costs you nothing. But a 60-day period at the same rate may cost 1 or 2 points. You pay these points at the closing. But, you may also take a slightly higher rate on the 60-day lock and pay no points. Either way, you pay for the longer period in one way or the other.
What are Your Circumstances?
Before you decide when the best time to secure your rate is, consider your circumstances. If you are buying a home, do you have a contract yet? If not, don’t hold onto any rates just yet. You don’t know how long it may take to find a home. You also don’t know how long negotiations will go on with the seller. If you pass your lock period, you must either pay for an extension or take the current rates, which could be higher.
If you are refinancing, rely on the expertise of the underwriter. Ask how long they think the process will take. They know by looking at your file what they may need. They can provide a ballpark estimate on how long underwriting may take. You can’t close on the loan until the underwriter clears your file, so it makes sense to ask.
Is your debt ratio close to the maximum allowed? If so, it makes sense to secure the rate you need when you can. This way you know you won’t have a debt ratio issue in underwriting. If you know even a slightly higher interest rate could put your approval at risk, don’t take a chance.
What if Rates Lower?
There is always the risk of rates decreasing after you lock a rate. What should you do? In all honesty, you might not have to do anything. The only time you really must react is if rates change drastically. Given recent history on rates, this isn’t likely. If, however, you stand to secure a rate that is at least 0.5% lower than your current rate, you have two options:
- Ask for a float down option – This is an option some lenders offer. This paid service allows you to take the lower interest rate. But, you have to pay for it. Make sure you do the math to see if it is worth it. Sometimes the cost outweighs the benefit of the lower rate.
- Go to a different lender – This is not an ethical choice, but sometimes it’s necessary. If you know you can secure a much lower rate somewhere else, you may have to change lenders. Try not to make a habit of this after a lender does too much work on your file, though. Again, make sure the change will make a drastic difference in your payment.
Know your Risk Tolerance
What it really comes down to is your risk tolerance. Are you a gambler? Do you like being on the edge of your seat? If not, and you are a more predictable person, lock in as soon as you can. If, however, you like the fun in waiting, wait it out. See how low rates get. You have to pick a rate sooner or later, but if you want to wait, you are certainly welcome to do so.
No two people will have the same idea regarding when they should lock their rate. Some follow the ‘rules’ shown that rates stabilize at the end of the week. This gives the market time to digest any new information that occurred during the week. Others believe Mondays are the best day to lock. Honestly, there is no best day or time to choose a rate. They can change many times in one day, let alone an entire week.
You know your circumstances and what you can handle. Base your decision on your own situation. If you have a specific rate in mind, don’t let it go. If it comes, choose that rate and move on. Don’t follow rates after that you will just drive yourself crazy.
If you have volatile circumstances, wait for the right time. Waiting for a purchase contract to get finalized is one example. Another is waiting to see if your debt ratio will get accepted. You don’t need to secure a rate at any specific time. As long as you have the lock in place before you close, you are good. Talk to your loan officer and see what works best for you. This is the best way to make the most of finding the right interest rate for you.