Lock it in: How (and when) to
secure a low mortgage rate
Mortgage rates have been trending upward in recent weeks, so if you’re starting the process of buying a home, now might be a good time to lock in your rate.
Deciding when to lock isn’t just about market conditions, because if you’re not prepared to complete the loan process within a certain time frame, you could end up paying hundreds of dollars in fees for locking in too early.
What Does it Mean to Lock In a Mortgage Rate?
“Locking in” refers to the lender and the borrower entering an agreement about how much the loan will cost, no matter the day your transaction closes. Common lock agreements are for 15, 30 or 45 days, and if your loan doesn’t close by the agreed-upon deadline, whether or not it’s a result of factors beyond your control, you’ll be subject to fees to extend the lock.
Even though it can be a little intimidating to lock in a rate and start the countdown timer on completing your mortgage, it can protect you from whatever happens in the market between the time you receive pre-approval and final approval for the loan. It can take more than a month to process a loan application — a lot can happen in that time frame, and if you don’t lock in your pricing, you may end up paying much more than you thought you would.
“They commit to particular pricing regardless of what happens in the market, as long as the borrower can get their end done within that timeframe,” said Joe Parsons, a senior loan officer with PFS Funding, a mortgage bank in Dublin, Calif. There are risks whether or not you decide to lock in a rate or not (meaning you float the rate): “If the pricing gets worse after I’ve locked, I’m still going to get that pricing. The converse is not true. … I am not going to get that lower rate because I entered into the agreement with the lender.”
For the borrower, trying to time the market to get a marginally better rate may not be worth the risk of rates spiking, Parsons said, particularly with the amount of volatility in the market right now.
“I’m advising, in general, people these days lock at the time that we have a complete loan package ready to go to underwriting,” he said.
Giving Yourself Time Is Key
At the same time, it’s important to leave yourself enough time to complete the loan application process, which can easily get delayed. Carlos Jaime, a loan officer and owner of CTC Brokers in California, said he cautions borrowers against leaving little room for error, just to save money (it’s cheaper to lock in a rate for a shorter period, say 15 days instead of 30). Common causes for longer loan application processes include appraisal delays, receipt of IRS transcripts (particularly around tax season) or the borrower failing to provide necessary documents in a timely manner.
Jaime and Parsons both said that, ideally, borrowers are working with knowledgeable loan officers who can confidently advise borrowers about the best time to lock in a rate and for how long. Once you give your loan officer the go-ahead to request a rate lock and he or she receives confirmation of that action, you’re on the clock to get everything done. Still, that doesn’t mean you should feel like all the pressure to make these decisions is on you.
“The biggest thing is educate yourself for sure, but at the same time use your loan officer to your advantage, you know, use them to help shoulder some of that responsibility,” Jaime said. “Keep in contact with your loan officer, and ask them questions, and they’ll be able to advise you to your specific situation.”
Having better credit gives you access to lower interest rates on a home loan, which can potentially give you more buying power. So before you even begin your search for a home, you may want to check your credit reports and credit scores to see where you stand. You may find errors that are dragging your scores down, or you may decide to take a little extra time to work on your credit to bring your scores up. You can get your free credit reports annually from AnnualCreditReport.com, and you can get a free credit report summary, updated monthly, on Credit.com.