Locking in mortgage interest rates can ensure a cost-effective and relatively stress-free mortgage application process. Market volatility and strict mortgage approval rules make this suggestion an imperative for prospective homeowners.
Current Mortgage Approval Constraints
Lenders who have survived the mortgage and real estate crash have adopted much more strict approval standards. Unlike normal market rules, should your interest rate increase prior to closing, instead of possibly adjusting the rate upward, you can lose your approval--at any interest rate.
Mortgage underwriting regulations--particularly required monthly income and credit score minimums--have become so tight that many formerly qualified borrowers can easily be "shut out" of the loan process. Locking your mortgage interest rate at application has morphed beyond important into the "critical" area.
Mortgage Rate Locks Defined
Rate locks are aptly named. When you lock a rate you protect yourself against interest rate increases over which you have no control. Depending on your monthly income and current rates, increases will not only cost you more every month for years, but might push you beyond strict debt ratios, resulting in a withdrawn approval.
However, when you have a rate lock, at your qualifying ratio, you can sleep well, knowing that your rate will not increase prior to closing your mortgage loan. Forget about the possibility that your application rate may decline a bit. That would be a pleasant surprise, but does not affect your ability to get the loan or purchase your dream home.
Rate locks guarantee your interest rate at closing. This is protection you cannot be without. Guaranteeing a rate, even minor changes of which could cost you an extra $50 to $150 each month, is important to your family budget and quality of life.
How to Lock in a Mortgage Rate
Just ask. Simple. All legitimate mortgage lenders offer rate locks. If you're speaking with a loan officer that refuses to lock your rate, find another lender immediately. Something is terribly wrong, almost certainly to cost you money.
Be aware that it may cost you to lock your rate. Don't worry, as honest mortgage lenders only require a reasonable, often just a "pass through" cost, to lock your rate. If you're involved in a home purchase, lock your rate for 45 to 60 days, as it may take you this long to complete the transaction.
Should you be refinancing your current mortgage, you might find a 30-day lock less costly and just as effective. Understand, however, should your closing occur over 30 days--particularly if you do not present required documentation--you may watch your rate lock expire, losing your protection. If your lender faces their own roadblocks to closing within rate lock periods, they will typically extend the time protection.
Be advised that 10- or 20-day rate locks are typically useless to you. Accepting these offers may generate more harm than good for you. Unless your lender "guarantees" you will close in 10 or 20 days (a most rare occurrence), you really do not have a valuable rate lock at all. The real world of mortgage loans mandates that 45 to 60 day locks are the most valuable to borrowers.
Fees for valuable rate locks should be expressed as a slight increase in your no-lock mortgage interest rate or an equally minor increase in the points (one point equals one percent of your loan amount) attached to your mortgage loan approval terms. Enjoying a guaranteed rate at closing will reduce your "application stress" and allow you to get the loan you want without blowing up your budget.
William Pirraglia - For over 30 years, Bill served in senior executive positions in the banking industry, including over 16 years as a CEO. In 2005, he bid ...
Join the Conversation