A rate lock helps protect a buyer from fluctuating mortgage rates
as you are getting ready to buy a home. It locks in the interest rate
for a loan for a certain period of time until you make it to
closing. You will know what to expect and won’t then fall mercy
to a week of rising rates, for example. However, if rates dip, you
could get stuck paying a higher rate too. So it can be a catch-22.
Here is when you likely will want to lock in their mortgage rate right away:
1. An offer has been made, accepted, and is under contract.
Many lenders will lock in a rate for free for 30 days. But you may want
to lock in for longer, for example, if the buyer is giving sellers more
time to find a home or if they’re self-employed and a lender needs
longer in underwriting their loan. As such, lock-ins are also available
for 90 days, 120 days, or even 150 days. But expect to pay to get longer
lock in periods.
2. Interest rates are rising. If interest rates are trending higher, lock in sooner rather than later, say mortgage experts.
3. Interest rates are volatile. If interest rates
are going both up and down, buyers may want to lock in sooner for
greater stability during their house hunt. “Rates today are unusually
volatile—they are making large moves up and down in short periods of
time,” says Joe Parsons, a loan officer at Caliber Home Loans in Dublin,
Calif. “For this reason, prudent borrowers are locking their rates
early in the process.”
4. You may not qualify for a loan otherwise. A buyer
may need to lock in a rate sooner if they are borrowing near their
limits. A fluctuation in rate could prevent them from getting their loan
approved. For instance, if a higher interest rate pushes a buyer’s
monthly mortgage payment above a 28 percent threshold (most lenders
believe a house payment should be no greater than 28 percent of your
gross monthly income) then a lender may not approve her for a mortgage.
“An early rate lock means there are no hidden surprise down the
road,” says Mark Livingstone, president of Cornerstone First Financial, a
mortgage lender in Washington, D.C.