Locking Your Rate

Locking interest rates is the most effective way to getting a good mortgage rate and comfortable terms in a 30 year fixed rate loan. When you lock fixed rate mortgage loans, you are guaranteed to get that rate as long as you close your loan within the lock period. Even if current fixed mortgage rates have moved, up or down, multiple times during this period, you will still get the rate offered at the lock date. The time period for which you have locked the rate is just as important as the lock itself.

As you can imagine, a 10-day lock is useless if it takes 50 days to close your loan. You must make sure that the lock period is sufficiently long to allow you to close your loan within the time frame. You must be careful when you ask for a mortgage interest rate lock. The "safest" rate lock time periods are 45 to 60 days. If you are locking interest rates at application, this should be an adequate time period to close your loan.

Interest rates, whether 10 year fixed mortgage rates or fixed rate home equity line of credit, can move rapidly. You can use a fixed rate mortgage calculator and witness the difference a movement of just one-eighth percentage could do to your rate. You should understand "What is a fixed rate?" and realize how it works. Those not familiar with the mortgage industry sometimes believe fixed rates parallel savings account rates (which they formerly did 25 to 30 years ago) or that a "variable" rate would move more quickly than a "fixed" rate. In reality, it works in just the opposite way.

Since fixed rate home loans contractually carry the same rate given at closing for the entire term of the loan whether it's a 10 year fixed rate mortgage or a 30 year loan, lenders must be much more careful and sensitive to current rates. Because most mortgage loans are sold quickly into the secondary market, to Fannie Mae, Freddie Mac, and others, they must have an acceptable current mortgage rate to be financially sound for the lender.

If you want an adjustable rate mortgage (ARM) with your rate fixed for one, two, three, or five years, you could live with a rate that increased a bit prior to closing without serious financial hardship. But if you're applying for a 30 or 15 year fixed rate mortgage and the rate moves one-quarter percentage before closing, your payment could increase significantly or you might even no longer qualify for the mortgage. This is either a problem or a disaster. Locking your rate at application for 45 to 60 days, provides protection against any unwanted interest rate surprises that could jeopardize your financing. While rate locks are usually technically "free", the reality is that your rate will most likely be slightly higher than the one quoted with no rate lock. However, unless you can close your loan on the day you make application - a physical impossibility - the rate given you has absolutely no meaning. The only fixed rate that has substance is the one you have locked.

Deciding on an fixed rate interest only mortgage is often a good idea but sometimes a risky one. You would be wise to minimize the risk as much as possible. Locking mortgage rate decisions are always wise courses of action. The rate of an interest only mortgage is absolutely critical since it represents your entire monthly payment for some time period. If it were not advantageous, or possibly necessary, you wouldn't have selected an fixed rate interest only loan in the first place.

Having the protection of a 45 to 60 interest rate lock should alleviate much of the inherent stress of the mortgage process. Don't be concerned that the rate might decline and you'll miss an opportunity to save some interest dollars. Should fixed rates be declining and your initial rate is fixed for three years or less, you might wish to consider letting your rate "float" until closing as you could win a lower payment and, if not, a minor increase is not a 30 year penalty. Otherwise, protect yourself and lock your application rate. You'll sleep better and eliminate one area of risk.

Although the "best" fixed rate mortgage may be a relative term, the best course of action is to lock your rate. Usually this will be the best rate and it will always be the safest rate. If you examine the options, you will come to the same conclusion. While a rate lock is good but not critical with an adjustable rate mortgage (ARM), it is the best plan of action with fixed rate loans.

Look at the possible events that could occur between your application date and your loan closing. The fixed rate could stay the same. The rate, including the refinance fixed rate, could increase and result in a higher monthly payment and cost you many more dollars in interest. Your rate could go down (usually less than a corresponding increase) and lower your projected monthly payment and save you many dollars of interest.

When the rate stays the same locking or not locking is a non-event, but you have depended on luck, not financial strategy to achieve this goal. If the fixed rate declines a bit, you have won but at potentially serious risk. Should the rate increase before closing, at least two negative things can happen. First, your monthly payment for up to 30 years will increase from the one previously calculated. Over the term of the loan, you will pay thousands of dollars more interest than originally projected. An even worse situation can occur. If you qualified just under the maximum percentage for the loan you want and the interest rate sustains a significant increase while you are awaiting closing, you could find that you no longer qualify for this loan. You could be forced to default on your purchase agreement or switch to a mortgage loan with unfavorable terms to complete your purchase.

Therefore, to avoid unpleasant surprises or even disaster, lock your rate at application for 45 to 60 days. In most cases, you will get the best - and safest - interest rate. If you believe fixed rates may decline during this period, ask your lender if you can have the option of requesting one rate change prior to closing. Some lenders will agree to this option. But having your application rate guaranteed should be sufficiently comforting and really is the best rate.

The ongoing debate of fixed rate versus adjustable rate mortgages (ARM) extends to the subject of locking mortgage rate importance. While 30 year fixed rate mortgage rates can fluctuate rapidly at times, ARM rates, although related to the overall market, historically move much less frequently. Although locking an ARM rate is helpful, it is not nearly as important as with fixed rate home mortgage. ARM rates are often already priced below what would be the market rate if calculated using the index and margin specified in the loan terms.

Whether a 30-, 20-, or 15-year fixed rate loan is what you seek, a legitimate rate lock is an important safeguard to avoid being given a loan you do not want. This is important even with a fixed rate option ARM and a fixed rate interest only mortgage as both your qualification and real life living with either product could be negatively affected with a significant rate increase prior to closing. A 40 year fixed rate loan interest rate lock is equally important since most borrowers using this product are doing so because they need the extended pay back terms to qualify for the loan they want. A dramatic spike in the 40 year fixed rate mortgage will often disqualify many borrowers.

Therefore, if you're going to apply for a 30 year fixed rate mortgage, lock your rate without exception. If you can negotiate a rate lock that allows you to change your rate at least once during the lock period, an option offered by some lenders, you could cover your bet a bit. However, if the rate declines by 1/8% during your lock period, you are still in better shape than if it increased by the same percentage. An interest rate spike in a one year ARM is annoying; a spike in a 20 year fixed rate mortgage will cost you thousands of dollars over the term of the loan.

Since most second mortgage rates historically do not move quickly, rate locks are less important than fixed mortgage interest rates. This does not mean you should ignore getting some type of rate guarantee with fixed rate HELOC (home equity line of credit) and fixed rate home equity loans. Surprises with fixed interest rates are usually not overly pleasant.

Rate locks with an ARM (adjustable rate mortgage) are less important since they often start at less than market rate anyway. In the continuing debate of ARM versus fixed rate, even in a second mortgage environment, rate guarantees remain win-win situations in most cases. Even your favorite lender is agreeable because they can set aside your funds and satisfy their financial plan properly.

Ask your prospective lender for a rate lock, even if only for, say, seven days from your approval date. Second mortgages can be approved and closed very quickly. This time period should be sufficient to close your loan and avoid any rate surprises. All good second mortgage lenders should provide you a reasonable guarantee of your agreed upon rate. A fixed rate HELOC, if you can find one, should carry the same reasonable rate lock guarantee from a legitimate lender.

There are few reasons or situations when you should not lock in interest rate. A few that might make some sense or at least may not cause a problem, include:

• You're applying for a fixed rate second mortgage, the rates for which usually do not change quickly;
• You have applied for a one, two, or three year adjustable rate mortgage (ARM) whose rates do not fluctuate up or down rapidly;
• You're considering a fixed rate interest only loan and rates do not fluctuate with the conforming fixed rate mortgage loan products;
• Fixed rates are declining and both data and experts predict even lower rates in the next 60 days.

Time frames for a lock in interest rate can vary widely. However, you, as the borrower, should mandate a 45 to 60 day lock period. A 30 year fixed mortgage rate can fluctuate widely in an unsettled interest rate environment and "floating" your potential rate could be a personal disaster in certain situations. A 30 day rate lock may be sufficient in some scenarios if your mortgage lender is very efficient and you cooperate fully. But, 30 days still carries some risk.

With very stable fixed loan rates in recent fixed mortgage rate history, many borrowers, particularly younger ones, do not know about the many occasions in the past 25 years when the fixed rate moved, not only daily, but sometimes hourly. At these times, the movement was always up. Those with a valid lock in mortgage rates were thrilled they had one. If a lender offers you a 10-day or 20-day lock, politely refuse. There is one exception to this mortgage lock rule: If you have "floated" your 30 year fixed mortgage interest rate up to your approval date, you could accept a mortgage rate lock for up to 20 days since your loan should be closed within that time period. If you haven't been "rate burned" until then, you can sleep well knowing your rate is guaranteed from this point forward.

An interest rate should be locked after you get fixed rate mortgage quotes, decided on a program, and have made an application. Fixed rate mortgage rates can escalate rapidly when the market moves and whether you are purchasing a home or using a fixed rate mortgage refinance, you must protect yourself. While getting the lowest fixed rate mortgage is important, if you have analyzed fixed versus variable rate and decided that fixed rate mortgages are best for you, locking your rate at application makes the process much less stressful and much more comfortable.

From a philosophical viewpoint, there may be times when you do not lock fixed rate loans. However, this is usually the right option only when rates are declining and you believe they will continue during your application period. If you choose to "float" your rate at this time and conditions change during the processing period, call your lender and ask to enable a mortgage lock rate immediately. A 15 year fixed rate mortgage rate can fluctuate equally rapidly so you are not immune just because you are not considering a 20, 30, or even a 50 year fixed rate mortgage.