When is it Right to Lock Your Mortgage Interest Rate?

If there’s one thing most borrowers are worried about, it’s their interest rate. Many borrowers want to lock their rate as soon as they get their pre-approval. Is that possible? When is the ‘right’ time to lock your rate?

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What is a Locked Interest Rate?

First, it’s important to understand what a locked interest rate means. While it would be nice if you could lock your rate and then take a better rate if it comes along, that’s not the case.

Once you lock your interest rate, it’s yours. Now, if the rate expires, you may be subjected to different rates, but don’t expect them to be any better than what you locked. Typically, you have to take the higher of the current market rate or your locked rate.

The one exception to the rule is if the lender allows you to pay for a ‘float down.’ This means that you have one opportunity to take advantage of a lower interest rate that is available. This is on a lender-by-lender basis, so you may want to see if this is an option for you.

When to Lock the Rate

Now comes the answer to the bigger question – when do you lock? First, you should know that you have to have an executed purchase contract in place. Most lenders, if not all, will not lock your interest rate without a contract in place. How do you know how long of a lock you need? How do you know when you will find a house? You need that contract in place first.

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Then the timing is kind of up to you. Do you have a specific interest rate you have your heart set on? If so, lock it as soon as that rate becomes available; just make sure you have enough time to get the loan closed before the rate expires.

If you don’t get the rate you want or you are just waiting to see what happens, know that you have to lock your rate at least a few business days before your closing. As your loan underwriting nears the end, you’ll have to think about locking the rate or the lender cannot prepare your closing documents. The rate must be in place as it plays a vital role in the loan and what your papers say.

Dealing With an Expired Rate

Expired rates happen all of the time. They aren’t anything to fear, but you should know how you have to proceed should it happen to you.

Typically, you have a few options. Most lenders allow you to pay for an extension. This is only helpful if you are within days of closing, though. If you still have a long way to go, you may want to find another lender. If you stick with the current lender, you’ll have to take the market rate (if it’s higher). If the rate is too high for you, finding another lender will give you a fresh start on the lock, but you’ll also start over from scratch with underwriting and approval.

So when is the best time to lock? As you can tell, it varies by loan and borrower. It even varies by lender. Each lender has different policies. Some are stricter than others when it comes to dealing with an expired interest rate lock. If you are unsure, ask your lender what they think. They do this day in and day out, so they know when you should lock your rate. Follow their advice, but keep your ‘target interest rate’ in mind as you figure out how to proceed.

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