When To Lock Your Mortgage Rate

 

Pacific Inland Home Mortgage offers interest rate locks at application for every type of mortgage that we offer.  A “lock” on a borrower’s interest rate guarantees that they will receive a specific rate if their loan is approved and is able to fund within the time specified in the lock.  Rate locks assure borrowers what payments they are going to receive on their home loan and often protect them from rising rates and changing market conditions.

 

When a borrower chooses to “lock” their interest rate with a lender, they are agreeing that they will accept the rate they are locking as well as agreeing to close within a given number of days.  If they do not close their escrow within the period of time agreed upon, in most cases they will either lose the rate or pay an extension fee.  When rates have not moved or have slightly decreased between the time that the rate was locked and the expiration of the lock period, many lenders will grant the borrower a “free” extension; when rates have gone up, the borrower is usually stuck with an extension fee.  If rates drop substantially after the rate is locked, most lenders will offer a lower rate to keep the borrower happy.

 

Locking interest rates is often essential when rates are moving up, since it protects the borrower from the prospect of higher interest rates and higher payments.  When rates are declining, borrowers often choose to “gamble” and wait to see if they can get a lower rate by waiting to lock until the last minute before they need to fund their loan.  Unfortunately, even when rates are trending downward, they do not go in one direction every single day.  Interest rates usually “see-saw” in a general upward or downward direction, meaning that they can go up and down on a daily basis as they generally trend in one direction or the other.  This makes it hard for borrowers to gamble and win when they only have so many days to close their escrow, which brings up the question of WHEN to lock your interest rate?

 

Daily mortgage rates are the result of the yields on bonds and mortgage securities sold on Wall Street.  Experienced mortgage consultants are trained to track bond and mortgage backed security markets on an hourly basis, as well as the economic reports that influence these sensitive markets.  Influences that push rates up are economic reports that indicate or predict rising inflation, such as increased employment, increasing consumer spending or rising wholesale or retail prices.  Influences that push rates down show low inflation, slower spending and slower employment and economic growth.  On any given day, it is possible to generally predict the daily climate for interest rates.  However, it is often hard to predict exactly what tomorrow will bring, even when the general trend in either direction is evident.

 

 In layman’s terms this means that mortgage professionals can tell you what rates are today and where they should be tomorrow, but we cannot know what surprises may come from tomorrow’s supply of economic reports—so if you are happy with today’s rates and you want to be assured that your rate will not go up, you need to lock your rate today.  If you are willing to lose an eighth of a percent in your gamble to gain an eighth of a percent, you can always choose to wait in hopes of locking a better rate tomorrow.  If you choose to do this, you need to be very clear that you are gambling and taking a risk of getting a higher rate.  Such gambling is not necessarily a bad idea as long as the borrower can afford to gamble and they know what they are risking.  When borrowers gamble and lose ground that they cannot afford to lose, ending up with a payment that is uncomfortably high, the gamble may be a poor choice.  Which brings us back to the advice that most professional mortgage consultants give to their clients:  “If you are happy with today’s rates, lock your rate and be happy.  If you choose to gamble on waiting in hopes of locking a lower rate, be prepared to take a rate that is higher than you can get today.” 

 

Borrowers have the best chance of success when they consult with a trusted mortgage professional, make an informed choice and are happy with the informed choice they have made.