There are a lot of questions when it comes to locking in your mortgage rate, and once again, I have turned to trusted mortgage professional Mark Maimon, Vice President, Residential Mortgage Group, for some answers.
I posed the following six questions to Maimon:
#1) What does it mean to "lock in" an interest rate?
#2) When should a buyer lock in an interest rate?
#3) How long should a buyer lock in their rate?
#4) What happens if a transaction doesn't close before the rate lock's expiration
#5) What if rates change after a buyer locks in their rate?
#6) Why might a buyer see lower rates advertised online or in other media?
Here's the insight he had to offer:
#1) WHAT DOES IT MEAN TO “LOCK IN” AN INTEREST RATE?
When you lock in an interest rate, you make an agreement with the lender that you will get specific terms for your loan as long as you close within the pre-determined rate lock period (assuming none of your qualifications or loan parameters change). Never assume that your rate is locked unless you have written confirmation that the lock request has been acknowledged by the lender. Keep in mind that rates can change multiple times per day on days when the markets are volatile and that your representation (mortgage broker or correspondent lender) may need some advance notice to lock the rate before any changes occur.
#2) WHEN SHOULD A BUYER LOCK IN AN INTEREST RATE?
A small handful of lenders will automatically lock in your rate once they receive your loan package, but the vast majority of lenders will allow you to lock the rate at any point during the approval process up to a week before closing. Rates generally go down when unfavorable economic news is released and they go up when favorable economic news comes out. You should ideally lock in the rate on a day when you feel that rates have hit a low point. If you feel that there is downward pressure on rates, then you may want to consider not locking in immediately since you may be able to lock a lower rate further into the approval process. If you feel that there is upward pressure on interest rates, then you may want to lock in right away. Although we may advise you on the ideal time to lock in a rate, it is ultimately your responsibility to monitor fluctuations in interest rates during the transaction and to lock in at the most advantageous time. Keep in mind that interest rate trends can be very difficult to predict and that rates can change multiple times per day on more volatile days.
#3) HOW LONG SHOULD A BUYER LOCK IN THEIR RATE?
Options for different rate lock periods will vary from lender to lender, but the most common ones are 15, 30, 45, 60, 75 and 90 calendar days (some lenders only offer one or two of these options). Most lenders offer better terms for shorter-term rate locks and may charge fees for any lock period exceeding 60 days. You should not lock in your rate until you are very confident that you will close before the rate lock expiration date (regardless of any unforeseen delays). Closing timelines can be very unpredictable for reasons out of your control so you should always leave yourself a significant cushion of time to ensure that you don’t miss your rate lock expiration date. On purchase transactions, you should always check with your attorney and real estate agent before locking the rate to ensure that you lock for a sufficient amount of time (especially on transactions that require approval from a coop or condo board).
#4) WHAT HAPPENS IF A TRANSACTION DOESN'T CLOSE BEFORE THE RATE LOCK'S EXPIRATION?
Each lender has their own policy on how they handle expired rate locks. You should speak to your mortgage representation about any possible implications specific to your transaction if you feel that you’re in danger of not closing in time. However, most lenders will either let you pay daily/weekly extension fees in order to keep your current locked rate or they will give you the worse of the rates comparing your initial locked rate to the rates available on the day after your rate lock expires. Extension fees can get very expensive and they will be charged to the loan applicant regardless of whose “fault” it is that you’re not closing before the lock expires. This is why it is very important to leave yourself a significant cushion between your rate lock expiration date and the anticipated closing date.
#5) WHAT IF RATES CHANGE AFTER A BUYER LOCKS IN THEIR RATE?
If rates go up, then the lender will honor whatever rate you locked in as long as you close before the rate lock expiration date. If rates go down, then one can pursue a rate renegotiation with the lender or look at switching your loan to another lender to take advantage of current rates (if time permits and if it is cost-effective to do so). Each lender has a different policy on when a rate renegotiation can be granted. Some lenders have a requirement that the rate has to change a minimum amount before they will consider any renegotiation request, and they may give you a rate slightly higher than the going rate at the time of the renegotiation. Most lenders will grant a renegotiation for free, while others may charge a fee to lower the rate. Keep in mind that the lender may only allow you to renegotiate once, so you want to make sure to execute it at the most advantageous time.
#6) WHY MIGHT A BUYER SEE LOWER RATES ADVERTISED ONLINE OR IN OTHER MEDIA?
Interest rates are transaction-specific and the final rate that you qualify for on your loan is based on several different loan characteristics (i.e. loan amount, financing percentage, property type, credit scores, whether you are paying points/discount fees, etc.). Since it is impossible to provide transaction-specific rate quotes through mass advertising, rate quotes in the media are inherently flawed and inaccurate. Most advertisers publish the absolute lowest rate assuming the applicant meets ALL of their “ideal” loan characteristics, which only applies to a very small handful of potential applicants. If you search the media for rates, you should always take any mass advertised quote with a grain of salt and be sure to read the fine print to uncover any assumptions they are making and any points/origination fees that are included in the quote. If something seems too good to be true, it almost always is!
I couldn't agree more with Mark's points above. Educate yourself and align yourself with a knowledgable, trusted team of experts for your real estate transaction. It will certainly make for a much less stressful and more enriching process overall.