Every home buyer should attempt to get the lowest interest rate available on his or her mortgage. A good mortgage rate significantly lowers your payments each month, so don’t rush, and prepare to spend the time and effort necessary to find the best rates.
Rates Are Constantly Changing
You may see an advertisement for mortgages with incredibly low interest rates, but months later, when you are closing on your new home, the rate will have changed. The advertised rates are only the rates currently available the day the advertisement was written. Mortgage rates can change daily, and rise and fall in unpredictable patterns. To ensure the rate you see is the rate you actually get, you will need a mortgage rate lock. Getting a lock on a good mortgage rate can save you many thousands of dollars over the course of your mortgage.
What Is A Rate Lock?
If a lender makes an agreement with a borrower to guarantee a particular interest rate, it is called a mortgage rate lock. Getting a lock on your interest rate is important, because closings often take several months to complete.
Lenders may offer the option to lock in a particular interest rate at the time you apply for your loan, during the processing of your loan, or when your loan is approved.
Lock In the Savings
Locking in a good mortgage rate is a very important part of obtaining your loan, because your interest rate not only determines your monthly payment, but also has a huge effect on the final amount of your loan. Using a $100,000 mortgage as an example, a mere 1% increase in your interest rate will result in a monthly payment increase of $65. Over a 30 year loan, this amounts to paying $23,400 more!
When Should You Lock In Your Rate?
Some borrowers hurry to lock in their interest rate as early as possible, because they are afraid of rising interest rates. This might not always be the best strategy.
A lower interest rate will help you save money over the long term, but it often comes with a fee or deposit. Some banks charge a rate lock deposit, some will lock your rate at a slightly higher interest rate, and others require borrowers to pay points in order to lock in a good mortgage rate. If you are required to pay points, they may be fixed or they may be adjustable, which means your payments can change over time.
Some banks use a tiered system for locking in interest rates. The fees change depending on the length of time the rate is locked. One month or less is typically free, but certain lenders offer free locks for up to 45 days. Fees for rate locks for longer periods of time increase incrementally over time, usually an increase for every 30 day period. These fees can vary from lender to lender.
If, for some reason, you do not close on your new home before the end of your locked rate period, your guaranteed rate will expire, and you will lose any deposits you have made. However, if the delay in closing is the fault of your lender, you may still be able to purchase your home at the guaranteed interest rate.
Locks Won’t Provide Unlimited Protection
Locking in your good mortgage rate will protect you from rising interest rates, but it will also prevent you from getting a lower interest rate if rates fall. However, your lender may offer what is called a “mortgage rate lock float down”, which will give you the ability to exchange your current interest rate once, if interest rates fall. You can check with your bank to see if it offers this service.
Even if you lock in your preferred interest rate, it is still possible for your rate to increase before closing. This is because some lenders include in their agreements the ability to raise interest rates a certain amount even when interest rates are locked. There is a limit to how high they can raise a locked rate, called a “cap”.
If you want a good mortgage rate, make sure you shop around for a bargain. Rates and fees will vary widely from lender to lender, so check out multiple offers. After you find the best rate, make sure to get your agreement in writing, and always read the fine print. Keep in mind that higher interest rates increase profits for mortgage lenders, so it is in their best interest to get borrowers to pay higher interest rates.
Finding the best interest rate, and locking it in, is an important step to owning your own home.