Should I Lock My Mortgage Rate Today?
Purchasing a house is a huge life decision and a significant event for most people's budget. It is one of the most substantial purchases most individuals will make in their lifetime. With such an important transaction, securing the best rate for your mortgage loan is essential, which includes understanding information about mortgages, credit scores, and fees. This article will provide valuable content to help you navigate this process.
A ‘rate’ is a real estate mortgage term for the interest rate one has on their mortgage loan. The higher your interest rate, the more you'll have to pay in interest on the mortgage over its life. So, securing a lower interest rate when you purchase a new home or refinance an existing mortgage loan means spending less money on your mortgage over time. Locking at a great rate on your mortgage can be a powerful way to save money, especially with the federal reserve influencing interest rates.
Your credit score is critical in securing desirable rates, while credit cards and other financial products can also impact your credit profile. Managing your finances responsibly is essential to maintaining a healthy credit score.
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What Is a Mortgage Rate Lock?
In today's real estate market, mortgage rates can be unpredictable. Because of this uncertainty, borrowers can lock in specific mortgage interest rates. Locking in the interest rate on a mortgage is called a mortgage rate lock - an essential aspect when planning your mortgage-related fees.
You can often lock in your mortgage rate at any point in processing your mortgage loan application up until the closing of the mortgage loan. A mortgage rate lock aims to find a time when the market has favorable mortgage rates and secure that rate for the life of your fixed-rate mortgage.
Interest rates fluctuate because of the cost of borrowing money, the stock market, inflation, federal actions, and various world events. Lenders know interest rates will likely change, allowing borrowers to lock in an interest rate for their loans. That is why finding a favorable rate and locking it in as soon as possible is helpful.
How Does a Mortgage Rate Lock Work?
Mortgage rate locks are typically available for 30, 60, or 90-day periods. Once you lock in a rate to one of these time windows, you will have the locked interest rate regardless of what happens with interest rates within that time frame.
Once the mortgage rate lock period is over, your locked rate expires. You will have to enter a new rate lock process with your lender. Locked rates are only valid during the specific lock-in period, so now you may have to wait for new favorable interest rates, if any become available, before you close your mortgage loan.
Does it Cost Money to Lock in Mortgage Rates?
Often, it costs nothing to lock in a mortgage rate. However, this may change if your rate lock expires. You may have to pay a fee to re-lock your mortgage interest rate in these cases. Furthermore, some lenders offer rate locks without any associated fee, while others charge for a rate lock. It all depends on your mortgage company.
If your loan closing gets delayed, your rate lock may expire. Keep the rate lock period in mind to secure the best interest rate on your mortgage, and do your best to close within the rate lock period.
When Is the Best Time to Lock-In Mortgage Rates?
As a borrower, you can lock in mortgage rates any time after completing a mortgage application with a lender. Mortgage lenders will accept a rate lock throughout the mortgage process until you close your mortgage loan. Alas, mortgage rates must be locked before the closing date.
Depending on the mortgage lender, exact rate lock deadlines will fluctuate. Make sure to check with your mortgage lender about relevant rate lock deadlines and check your rate lock agreement from your lender for the rate lock expiration date.
What if Rates Fall After I Lock My Mortgage Rate?
Unfortunately, after you lock in a rate, rates can drop. You have a couple of opinions if this happens.
First, it may be suitable to keep the rate you locked in. Market interest rates change all the time.
Secondly, ask your lender if you can re-lock the interest rate at the lower prevailing rate. This process may open a chance to negotiate with your lender over a rate adjustment.
Some lenders will offer a 'float down' option (meaning your rate lock will automatically consider a lower interest rate if one becomes available).
What Is the Float-Down Option?
Many lenders may offer prospective buyers a float-down option when a mortgage loan interest rate is locked during their mortgage application process. This option allows you to lock an interest rate at a given rate and will be adjusted should the lender’s interest rates fall before your closing date. That can be particularly helpful for a homebuyer entering a fluctuating economy, as it can help alleviate concerns about credit changes and any existing debt, such as student loans.
You must agree to the lender's float-down terms to qualify for this option. These terms often touch upon areas such as the duration of the float-down, how much interest rates have to shift for the float-down to take effect, and what types of services they provide. Float-down options are usually more expensive than locking a rate outright. However, if interest rates reduce drastically during your mortgage application process, float-downs stand to save you considerable amounts of money.
You must weigh a float-down option's potential costs and benefits to know if it suits your needs, and asking questions about the various options can help. A standard rate lock may be best if the market interest rates are relatively constant in your area when applying for a mortgage.
Should I Lock or Float My Mortgage Rate?
Floating the interest rate means not locking in a specific interest rate and accepting the current interest rate when your loan closes. That can affect your overall mortgage costs, especially if you are operating a business or managing other forms of debt.
Everyone wants to get their monthly mortgage payment as low as possible. When locking in an interest rate, there are a lot of unknowns. Often, there is no clear answer as to whether or not someone should choose to lock a rate or let it float. However, these guiding principles should be helpful.
First, examine interest rates at the time of applying for your mortgage loan. Rising interest rates could indicate the right time to lock in your rate. If rates are falling or expected to fall soon, it may be best to let the rate float. To position yourself to make the best decision, you'll have to dig into past and current interest rate data. Look for trends in the data. Are rates dropping each winter season? Is the market as a whole going down, rising, or staying the same? Understanding these trends will help you make the best decision possible.
Next, consider the rate lock options your lender is offering you. If you have a float-down option available for a reasonable price, consider that option. If you use a float-down, you won't have to worry about finding the best time to lock your rate because you will benefit from the lower interest rate and protection from rising interest rates during the rate lock period. Also, it's good to remember that you can always refinance your mortgage at a future date if the market changes in your favor.
How Long Can You Lock Your Mortgage Rate?
Most mortgage rate locks are typically offered for 30 and 60-day periods. However, every lender is different. Some lenders may allow borrowers to lock rates for up to 90 days or longer.
What Happens if My Rate Lock Expires?
Mortgage rate locks don't last forever. The exact window one has for a rate lock depends on the lender and your chosen option.
A rate lock expiration occurs when a rate lock period ends before the closing date. Some lenders may have a certain grace period; others may not. It's critical to understand your rate lock terms before agreeing to them. It is easy for unexpected delays to come up during the buying or refinancing process, which may slow you down.
Consider Your Circumstance To Make the Best Decision
Some people want to lock in the best interest rate upfront when they submit an application to a lender. Others are fine accepting the current market rate at the time of loan closing. Sometimes the market interest rate may barely change throughout your mortgage application process. In this case, the best interest rate saves you a minimal amount on your monthly payments. Securing the lowest possible monthly payment on your mortgage may not be worth the work or risk - especially if that best rate only offers you marginal savings.
Every buyer has unique circumstances that make certain decisions best for them. Sometimes the best decision for someone else may not be the best decision for you. Always weigh your individual circumstances to determine the best move for you.
Consult with a Wesley Mortgage representative to learn more. Our experienced team can help guide you through this process, addressing any questions or concerns you may have about incorporating your specific financial situation and managing any student loans or credit-related issues.
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