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Control your lock

While you are getting your mortgage, interest rates are a moving target. One week they’re higher, the next they’re lower.

By “locking your rate” what you are doing is making an agreement between yourself and your lender to fix your interest rate for a period of time. Some lenders charge for this and some don’t. The most common time period to lock a rate is 30 or 60 days.

What happens if rates go down?

If you’ve locked your rate and rates go down, your lock agreement may have a clause that says you can withdraw from the agreement. You want to make sure your agreement allows you to withdraw if rates go down.

Some agreements have what is called a “float down provision”, which is where you can get the lower rate without ending the agreement.

How do you know if rates will go up or down?

No one knows where mortgage rates are headed (though some people may claim to!). Mortgage rates are related to the movement of the U.S. 10 Year Treasury Note. If you could predict accurately the movement of the 10 Year Treasury Note, well, you’d be very well off!

The value of the 10 Year Treasury Note is based on a wide range of global macro factors. Global factors can include things like a decline in interest in treasury bills from overseas, or the likelihood of counter parties to pay back debt, for example.

What does it mean when your loan officer says “time to lock”?

No mortgage loan officer can predict where we are in a range. For example, in the last three months of 2019, the average US mortgage interest rate range has been between 3.49% and 3.78% (the 10 Year Treasury Note has been between 1.461% and 1.942% during the same time period).

What is a rate lock

Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis

what is a rate lock

U.S. 10 Year Treasury Note, MarketWatch, 3 month period

There are many information services loan officers subscribe to that give mortgage loan officers  alerts saying to tell their customers (you) to lock their rates. But these are based on predicting the movement ultimately of the 10 Year Treasury Note, which is hard to predict.

So when your loan officer tells you to “lock your rate” based on his or her own intelligence, take it with a grain of salt.

When should you lock your mortgage rate?

You should lock your rate when you have a rate you can afford, that’s the best deal for you. Also, one that offers a float down provision and/or the ability to exit the agreement. And you want to evaluate whether the lock fee low enough that you still have a good deal.

So, make sure you get the details of your lock and also the float down provisions before you agree to anything. That way you are protected if the rates go up, and can take advantage of better rates if they go down.

How long should you lock your mortgage for?

Your lock should cover your expected closing time. Average closings are about 44 days which would mean a 60 day would cover the average closing time. If you have a reason to think your mortgage will be wrapped up within 30 days, you can choose a 30 day lock.

What affects the length of the expected closing period?

Many factors affect the length of a closing. Some factors out of your control are if a home appraises lower, which makes you scramble to come up with a higher loan amount or a larger down payment. Another factor that can affect closing is the home inspection. If major issues are found, a lender may require that they are fixed before agreeing to lend to you. Other delays could come from the seller’s side. And sometimes, the mortgage process just takes a lot longer than the loan officer admits to, or expects.

What happens if you don’t lock your rate?

If you don’t lock your rate, then your rate could fall or rise along with current interest rates. If interest rates stay the same or fall, then you could save money, especially if a lock is pricey with your loan. If interest rates were to rise, then your loan would become more expensive.

A lock is like an insurance policy for your rate. You just need to weigh the cost of the lock with the risk of interest rates increasing.

What should you ask your lender about locks?

Find out the cost of a 30 day and 60 day lock. Also, ask about a float down provision that lets you take advantage of lower rates if rates fall during your lock period. And, if there is no float down provision, what happens if you want to withdraw from your lock agreement if rates were to fall.

This way, you’ll have the information you need about the lock, the term, the cost, and how to take advantage of better rates if they become available.

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