If you’re asking yourself, “Should I lock down my mortgage rate?” you are in the right place. Choosing to lock down your mortgage rate is a risky financial decision, but one that can sometimes really pay off.
Should I LockDown My Mortgage Rate in 2018?
Here’s what you need to be aware of before you decide whether or not to lock down your mortgage rate:
What Does It Mean to “Lock Down” a Mortgage Rate?
When you lock down your mortgage rate, it means that the interest rate on your loan freezes until the loan closing. If the original interest rate fits your budget, it can sometimes be a good idea to lock it in.
How Does the Rate Lock Process Work?
The rate lock process is completely between you and your lender. Your real estate agent is not involved in the negotiations or decision-making process.
Rate locks typically only freeze a mortgage’s rate for a predetermined amount of time. This period is usually between 30 to 60 days because this is about how long it might be between when you make your official offer on a home and when you close on it.
The rate lock period should cover the initial loan approval, its processing and underwriting, and its closing. Rate locks can sometimes be longer on construction loans.
Sometimes, lenders will offer the initial rate lock free of charge. After the initial rate lock period expires, the lender will then charge you a fee if you wish to extend it.
This way, you won’t need to worry about your mortgage rates increasing while you are still trying to finalize a deal. Because of this, your future monthly expenses will be more predictable, making long-term financial planning a bit easier.
What Should I ask My Lender before I Commit?
You should always ask your lender about the expected length of the loan closing process, so you know how long to set the period of the rate lock.
It is also always a good idea to take this suggested timeframe with a grain of salt. This means that you should build in a cushion around the rate lock period, just in case negotiations go for longer than expected.
Is It Always a Good Idea to Lock Down Your Mortgage?
It’s not always a good idea to lock in your mortgage, as it’s a bit of a gamble. That is, once you commit to a particular rate, it won’t change at all.
If rates continue to rise, this can be great for you financially, because it means that you will not be priced out of your dream home while you attempt to secure financing. However, if prices drop, it can be extremely frustrating, as you now will be paying more than you need to on your mortgage.
Yet, most potential homeowners do choose to lock in their interest rate, particularly if they are already comfortable with it. Locking down your mortgage is kind of like quitting while you are ahead. If you are satisfied with the rate you have, it might not be worth it to wait until something else comes along.
This is because mortgage interest rates change as quickly and as often as the stock market. It is impossible to accurately predict the trends, as interest rates are up one day and down the next. Even experts who say that they can “predict” long-term trends are not going to be correct 100% of the time.
Are There Any Exceptions to a Rate Lock?
Yes! Usually, a home loan’s interest rate won’t change at all once you lock it in, but there is one exception to this rule: a one-time “float down” cause.
Let’s say you lock in a rate of 6% interest on your mortgage. But, while you are still completing the application process, the interest rate drops to 4%. If you included a float down clause in your contract, you are allowed to lock in the 4% interest rate for your new mortgage, instead of being stuck with the higher rate.
If you are interested in this option, you should be aware that lenders require a larger deposit on rate locks with float down clauses than they do for traditional mortgage rate locks. However, this gamble could also be worth it, as even a difference of 1% played out of the life of a 30-year mortgage could mean significant savings.
Are Rate Lock Periods Indefinite?
No. Mortgage rate locks do not last the lifetime of the loan. This is because they do not need to. They only exist to provide stability in the period between the initial application for the loan and its finalization.
The rate you sign for is locked in until you pay off the mortgage once you close on your home and your loan. The only reason this would change is you choose to refinance your mortgage later on down the line.
Can I Back Out of a Rate Lock?
Yes. If you get cold feet or otherwise decide to back out of rate lock agreement, you typically can do so; however, there is almost always a cancellation fee.
On the other hand, the lender can choose to cancel the rate lock agreement if the vital information you provide at the time of your application proves to be untrue or changes in any way. Vital information usually includes things like your credit score, your income, and the status of your employment.
The lender can also choose to cancel the rate lock agreement if the terms of the loan itself change. An example of this would be choosing to go with a 25-year mortgage instead of 20-year, or swapping out a fixed rate mortgage for one with an adjustable rate.
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