Do you want to discover how to increase your odds of success when it comes to using a mortgage rate lock, rate locks or locking in your mortgage rate? This article will give you the wisest advice you will never receive anywhere else. Locking in a mortgage rate requires both luck and skill. Before you make a decision of using it or not, this article will disclose to your various circumstances when you should and shouldn't use mortgage rate locks.
Should You Always Lock Your Mortgage Rate?
First things first, a mortgage rate lock is essentially a written agreement between you and your lender (not necessarily your broker) that allows you to maintain a specific interest rate over a given number of days despite the rising/falling interest rates. If you do not lock your mortgage rate, your interest rate could rise or fall by the time the loan paperwork- processing is completed. This means that your debt to income ratio could either decrease if interest rates fall or increase beyond your ability to qualify for that dream home if interest rates rise before your loan is processed.
The decision to lock your mortgage rate or not depends on your smarts. If you expect interest rates to fall, then do not lock. If you believe interest rates will rise, it would be wise to lock in the deal. Additionally, you could wait for interest rates to fall before applying for the loan. However, waiting might expose you to the risk of losing your dream home if the seller has other offers from competing buyers who are ready to close the deal in a short duration of time or if you aren't pre-approved. If interest rates are at record lows, it goes without saying that you should lock your mortgage rate because the probability of it rising is pretty high.
Advantages of Mortgage Rate Lock
It Eliminates Guesswork - a mortgage rate lock takes the guesswork out of your mortgage payment plan because it enables you to determine the exact monthly payments required from you. With mortgage rate-lock, you can tell exactly how much your monthly payments will be without fumbling. This assists you to determine the amount you can afford towards your dream home without over-stretching your financial needs.
Cost Effective - current increases in interest rates can deny you that dream home. In May 2016, the rate for a 30 year fixed mortgage was 3.76 percent up from 3.31 percent in 2012. In a situation like this, mortgage rate locking will give you peace of mind from the increased interest rate.
The Disadvantage of Mortgage Rate Locks
Expiring Rate Lock Period: A mortgage rate lock comes with an expiry date. The shorter the lock duration, the riskier the gamble because the loan processing period might take longer than your selected lock period. A lock duration of 45 days is highly recommended because this is approximately the required time to complete loan processing from the moment you apply.
Nevertheless, it doesn't mean that you have lost everything if your lock duration expires before your mortgage loan is approved. A borrower is entitled to get an extension to re-lock a loan for a given period. The extension will be reflected by a slight increase in the interest rate.
Mortgage rate locks do not come for free! When you lock your mortgage loan, you must select a rate-lock-period. This period can vary from one week to three months or even longer. The most common lock period is between 15 to 45 days.
The longer the period of mortgage rate lock, the higher the cost concerning basis points. You may not be charged an upfront lock-fee, but you will incur a high-interest rate. For instance, the difference between a 60-day lock and a 15-day lock is as much as 0.5 percent ( 50 basis-points).
Interest Rates Might Fall - if interest rates fall, you lose. However, you can use the "float-down option" to reduce your locked in rates when interest rates fall. This gives you an opportunity to lower your rates if the mortgage loan rates happen to decrease significantly after locking your loan-interest-rate.
A charge might accompany this endeavor, but not always. You might as well try to re-negotiate your mortgage rate with your lender to see what ensues. Some lenders might agree to new terms to maintain a healthy relationship with you.
Overall, if you lock your mortgage rate, and if the rates go up, you win. On the other hand, if you lock in your mortgage rate and the rates go down, you lose. You can back out of the deal, but the lender might charge you a contract termination fee. Ensure you are informed about the rewards and risks of mortgage rate lock before rolling the dice and hoping for the best.