Market conditions are a big reason as to why you should lock your interest rate. Quite simple – locking that interest rate will protect you from increases due to market conditions. If you lock your interest rate early, it can safeguard your budgeted payment. Here’s how it works – if you lock the rate, and the market goes up, you still get the lower rate. If the market goes down after the lock, you might be able to pay a fee allowing you to lower the rate.
The big question is knowing when to take the lock – and that’s determined by which direction you think the market might be going. If you think rates are going up, lock those rates in early. If you think the rates are going down, ride it out a little until a few days before closing to see which direction the rates are headed.
In some cases, a lender may allow a borrower to lock in a rate after pre-approval – but in most cases it’s very common to wait until there is a signed contract on the home. Even with a pre-approval, it could easily take 30 days or more to close a transaction and the rates can move a lot in that period.
A fee also might be charged to lock a rate – and that fee is determined by the lender. Generally, the longer the time for the rate lock, the higher the fee.
A lock period is established by the lender – and that will guarantee the rate if the loan is closed by the expiration date. The normal lock periods can be between 30 and 60 days. Longer periods may be available, however they normally require higher fees.
Things that could affect your rate lock are:
- The appraised value comes in lower than what was expected in the sales contract.
- The borrowers’ credit changes considerably before the closing.
- The loan amount changes after the rate lock.
- The loan type changes.
- The down payment decreases before the closing.
- Some income, like bonuses or overtime, could not be verified.
It may be important to lock in early if a higher rate at closing means you will no longer be able to qualify for the mortgage. Take a look at the rates in the preceding weeks – they indicate a trend. It’s also very important to trust a mortgage professional who can provide good and sound advice, and lead you in the right decision on either locking the rate or letting it ride. Your real estate agent can also help, but ultimately, the decision is yours!
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