A mortgage rate lock helps protect homebuyers from fluctuating mortgage rates as they're getting ready to buy a home. It locks in the interest rate for a loan for a certain period of time until the buyer makes it to closing. By locking in a rate, buyers will know what to expect and won't have to worry about rising rates later.
However, if rates dip, homebuyers realize they could get stuck paying more money each month. So it can be a catch-22.
Best times to lock in a mortgage rate right away:
1.An offer has been made, accepted and is under contract. Many lenders lock in a rate for free for 30 days. However, buyers may want to lock in for a longer period, for example, if the buyer is giving sellers more time to find a home, or if they're self-employed and a lender needs more time underwriting their loan. As such, lock-ins are also available for 90 days, 120 days or even 150 days. But expect to pay more for longer lock-in periods.
2.Interest rates are rising. If interest rates are trending higher, lock in sooner rather than later, say mortgage experts.
3.Interest rates are volatile. If interest rates are going both up and down, buyers may want to lock in sooner for greater stability during their house hunt. "Rates today are unusually volatile – they are making large moves up and down in short periods of time," says Joe Parsons, a loan officer at Caliber Home Loans in Dublin, Calif. "For this reason, prudent borrowers are locking their rates early in the process."
4.A buyer may not otherwise qualify for a loan. A buyer may need to lock in a rate sooner if they are borrowing near their limits because any upward fluctuation could prevent them from getting their loan approved. For instance, if a higher interest rate pushes a buyer's monthly mortgage payment above a 28 percent threshold (most lenders believe a house payment should be no greater than 28 percent of your gross monthly income), then a lender may not approve a mortgage at all.
"An early rate lock means there are no hidden surprises down the road," says Mark Livingstone, president of Cornerstone First Financial, a mortgage lender in Washington, D.C.
Source: "When to Lock in Mortgage Rates: 4 Signs It's Time," National Association of Realtors (Jan. 23, 2017)
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