Rates overview -> When to Lock Your Rate

When to Lock Your Rate

Rates often move quickly and unexpectedly
in response to economic news or world events.

Rate locks:

When you lock the rate, the lender guarantees the rate will not change if your loan closes by the lock date. In return, you are agreeing to accept that rate even if interest rates drop after you have locked. However, most lenders have a policy that will permit you to renegotiate for a fee if there has been a sharp rate drop after you have locked in a rate and before your final loan documents have been prepared. When you lock in your rate ask what the lender’s policy is for an extension if you are not able to close by your lock date. Most lenders will allow a short extension for a small fee. Loans are generally locked for 15, 30, 45, or 60 days.

The pricing of the loan increases slightly as the lock term increases; you will do a little better locking for 15 days rather than for 30, for 30 days rather than for 45.

The minimum term of the lock is dictated by close of escrow for a purchase loan, or the amount of time your lender thinks necessary to close a refinance loan. If your purchase is closing in three weeks, you cannot opt for a 15 day rate lock because you’re not closing for 21 days. In a booming refinance market you may have to accept a 45 day lock if a busy lender can’t close your refinance loan sooner.

Timing the lock:

It is impossible for anyone to know what interest rates are going to do in any 15 to 60 day period. Interest rates are inherently volatile, and they can move sharply on unexpected economic news or world events. The release of the monthly unemployment number or the monthly consumer price index can have a dramatic effect; so can the tone of a Federal Reserve Board governor’s after-dinner speech in Oklahoma City. Because of this uncertainty, most lenders will want you to lock in your rate upon receiving your application.

If you wait to lock in, hoping to get a better rate, your chances are better if the current rate trend is down. When rates have been rising over the previous three to six months, hoping for a tick down in the succeeding few weeks is a gamble. Even if rates have been steadily declining, in any given month they can still move higher. In fact, even hugely successful bond traders bet right on short-term interest rate moves only 55% to 60% of the time. It is unlikely that a mortgage broker, a banker, or you will do better. If you are satisfied with the rate and terms you have been offered, locking in the rate when you apply is a prudent move.

It is almost impossible to hit the bottom in rates when buying or refinancing. If you have chosen a loan that has no points and no prepayment penalty—something I usually recommend—you can always refinance down the road if rates continue to drop. Remember, by locking your loan, the lender is providing an important service. Lenders take on risk when you have locked a rate—they hedge their exposure and lose money when borrowers who lock an interest rate fail to close.