When you start shopping for a new home, the first step will be speaking with a mortgage professional to get pre-approved. This will inform you of your options, your maximum loan amount, required down payment and closing costs, and eventually locking in your rate. Most professional Real Estate Agents will not even show you a home without being pre-approved to purchase. We wanted to discuss the rate lock stage of the mortgage process and hope to help you better understand the terminology.
Many people do not understand what locking in the rate actually means, what the consequences can be, or what the advantages can be. We decided to explain the process to better inform you on when to lock in your mortgage rate.
When you lock in your mortgage rate you are doing just that, locking it in. This means if the rates go up, you are safe and locked in at the lower rate. Sometimes however, the market can move down, and rates are lower. This also still means you are locked in at the higher rate and you cannot lower the rate just because they are lower today. When locking in your rate, you must understand the process. It is always the home buyer’s decision when to lock the rate. If you are one that loves to watch the market and follow Wall Street, then you may want to float your rate until you get the feeling the market is ripe to lock in that low rate, but just remember you may be wrong and will have to live with the consequences if doing so, but not doing so could also make you live with the consequences if the rates suddenly move up. Most well-trained Loan Officers will be watching the market trends and help you make a more educated guess. Do not presume they have a crystal ball of Wall Street and have mercy on them should they make a mistake. They can advise you, but it is always your choice. No one can truly tell the future of the world economy.
There is one exception to the rate lock rule which is good news to the borrower. If the market moves significantly by 100 points on the bond market to a lower rate, the lender is able to adjust the rate down to market pricing without a charge to the borrower. If it however moves down 99 points you are not eligible to have a rate market adjustment. It would cost you paying discount points to lower your mortgage rate. On a side note, it is not recommended to pay points to lower your rate unless you plan on being in your home longer than around seven years, as it will take on average six to seven years to start taking advantage of the lower rate. Your upfront costs will begin to pay off at this point. If you plan on selling before that seven-year mark, we do not recommend you buy down your rate. It would likely be a cost and not a savings to you.
We hope this helps you make a better decision, or at the least understand what your loan officer is trying to explain to you. Good luck on making the right decision, and remember it is your decision to make.