Recently interest rate volatility has become commonplace in the mortgage world. It is no longer uncommon for an interest rate to swing in any specific direction of up to 0.5% on a given day.
This has major ramifications for homebuyers who are looking to obtain financing to the tune of hundreds of dollars per month in mortgage payments. As a result, it is more important than ever to understand the mechanism behind interest rate locks.
What is an interest rate lock?
An interest rate lock is a function where your lender procures a specific interest rate for your mortgage loan at a singular point in time. Once your mortgage loan is “locked” your interest rate will no longer change as a result of market volatility. This can be good or bad depending on whether interest rates rise or fall after your lock occurs. A typical lock period ranges from as short as 15 days to as long as 60 days with the shorter lock periods being more fiscally enticing. There are longer rate locks available but it is more niche situations that these are used for.
When can you lock an interest rate?
When you can lock an interest rate depends on your individual lender. The majority of lenders, including ourselves with some exceptions, require a client to be under contract on a property before allowing a rate to be locked. Some lenders advertise the ability to lock an interest rate while searching for properties however this is often an expensive option and normally ends up being an overall detriment which is why we do not typically recommend this approach.
What is the best approach?
The best approach when it comes to locking an interest rate varies based on the current market environment and individual risk tolerance. You should discuss with your lender upfront what rate lock options they provide and which they believe to be the best for your specific scenario. Remember that while mortgage lenders can provide sound guidance based on experience and market knowledge even they can not accurately predict short-term fluctuations.
As a reference point, mortgage rates are correlated to how the 10-year treasury note is performing. As a mortgage lender, we use this information to determine the short-term outlook on interest rates.
What happens if your interest rate lock expires?
If closing on a home purchase is pushed back far enough, a rate lock can expire before you are set to close. If the closing delay is not substantial the best option to explore is extending the rate lock which typically comes at a cost per day. If the delay is on the longer side you will likely need to discuss the ramifications of letting the lock expire as that can vary based on each specific loan product.
The Bottom Line
The bottom line is that rate locks are inherently tricky to navigate. It can make sense to lock upfront or late in the process. Ultimately, if you are comfortable with the interest rate and monthly payment associated with it while under contract that is typically the best time to lock.
If you have any questions about this topic or any other mortgage-related topics feel free to reach us at (760) 930-0569. One of our knowledgeable Loan Consultants will be more than happy to answer your questions.