Knowing the best time to lock in a mortgage rate is important. Your interest rate determines how much it costs to borrow the money. It can also make the difference between loan approval and denial because it affects your mortgage payment amount.
Here’s everything you must know about locking in a mortgage rate to get the best terms.
What Does it Mean to Lock a Mortgage Rate?
A mortgage rate lock is a guarantee from a specific lender to honor the mortgage rate offered for a specific period. For example, if you lock in a 5% rate for 30 days, you’ll get that rate when you close as long as you close the loan within 30 days.
The interest rate doesn’t change even if market rates increase or decrease during the lock period. Sometimes there’s a fee to lock an interest rate, and other times it’s worked into the rate. Your lender should be transparent with you about the cost before you agree to lock the rate.
With a locked rate, the market’s performance doesn’t concern you. If rates increase, you are protected. But, if rates drop, you don’t get the lower rate. It’s a trade-off that every borrower must make at some point.
However, some lenders offer a float-down rate, giving you a one-time option to take a lower rate if market rates drop. You must keep the locked-in rate if you don’t have a float-down option.
When Should you Lock a Rate?
Interest rates change daily and sometimes multiple times a day, so many borrowers want to know the best time to lock in a rate.
There isn’t a one-size-fits-all answer. For example, we can’t say Wednesdays are the best time to lock. So instead, we encourage you to shop around for the best rate and when you find it, lock it. There’s one more step, though.
You should be approved for the loan before locking it. Don’t shop around with different lenders and lock in a rate before knowing you qualify for their programs. Each lender has different requirements. But when you work with a reputable mortgage broker like Loan Factory, you can access over 34 lenders with competitive loan programs.
When we find the best loan, we’ll help you determine the best time to lock in a rate to provide you with the most attractive terms for your loan.
How Long do you Lock a Rate?
The typical lock period is 30 days. These lock periods don’t cost extra and are long enough if you’re already through the pre-approval stage and have found a home.
If you’re building a home or haven’t found the right home yet, but found the right rate, you might consider a longer lock period of 60 days. Unfortunately, most lenders won’t allow lock periods longer than 60 days.
The Benefits of a Rate Lock
It can be scary to commit to a specific rate. What if they change?
While it’s a big decision, here are the benefits of a rate lock.
You’re Protected from Rising Interest Rates
No one can predict 100% what rates will do. If rates increase and you have a locked-in rate, you have nothing to worry about. You know you’ll close at the rate the lender locked. This ensures you don’t lose your loan approval. If rates increase and you don’t have a locked rate, the lender must underwrite your loan again at a higher rate. If your debt-to-income ratio was close to the maximum, it could cost you the loan approval.
You get Peace of Mind
It can be stressful wondering what interest rate you’ll end up with when you close. While no one can close a loan without locking the rate, if you get down to the final hour, you could be at the mercy of market rates.
Instead, locking in a rate when they’re close to where you want them can give you peace of mind. Next, you can focus on moving into your home and all the work that entails.
-> Learn more: How to Choose a Mortgage Lender
Can you Shop Around after you Lock a Rate?
While you can go to a new lender after locking a rate, you’re starting from scratch. This means going through the approval process all over again. In addition, if you have already signed a purchase contract and are near the closing date, you might have problems with the seller if you delay the closing.
How do you Get the Most Competitive Rates?
To qualify for the most competitive rates, consider these tips:
- Maximize your credit score – The better your credit score is, the easier it is to qualify for competitive rates. Pull your credit and see what needs fixing. For example, do you have late payments or overextended credit? Fix them before applying for a loan. This may increase your chances of securing competitive rates.
- Decrease your debt-to-income ratio – Lowering your debts will help you qualify for competitive interest rates. Pay debts off if you can, or keep your DTI at 36% or lower to get the most competitive rates
- Make a large down payment – If you have the capital, consider making a larger down payment than the minimum. For example, consider a down payment higher than 3.5% if you borrow an FHA loan.
The best time to lock in a mortgage rate is when you’re approved for a loan and ready to commit to the current rate. Every borrower will have a different threshold that works for them. Lock your rate when you’re comfortable with the rate and know that you’re locked into the rate and most likely, can’t change it.
At Loan Factory, we help our borrowers understand their options to choose the rate that makes the most sense for their situation. We’re happy to walk you through the process and help you shop around for the most competitive interest rate for your loan.