Q: Everyone I talk with about my house search tells me I need to shop mortgages and lock in a rate. What do they mean?
If you're on the market for a house now, congratulations. This is an historically good time to buy. Interest rates are low and prices are rising in most markets. Even if it seems like a disorienting and confusing process, home buying is worthwhile in the long run.
A rate lock is an agreement by a lender to ensure a rate on a loan for a set period of time. Regardless of what the mortgage market does before the closing date, the "points," duration, and interest rate will remain the same. The lock agreement is valid until a few days after your expected closing date to account for any potential complications and can be rejected only if some serious error emerges during the qualification process.
When should I get a rate lock?
Rate lock agreements are usually offered for 30, 60 or 90 days. The longer term locks may seem like a good deal, but they usually come with higher origination fees. A 30-day rate lock might establish a 4.00% interest rate with a quarter point (or 0.25% of the value of the loan). A 60-day lock on that same loan might include a half point instead (0.50% of the loan).
It might be tempting to get your mortgage rate set in stone before you've started looking at homes so you have a good idea of your price range. As convenient as it sounds, doing so could cost you in the long run. Interest rates don't change that fast. Over the past year, interest rates have gone from a low of 3.55% to a high of 4.20%. The worst month ever for mortgage rates saw an increase of about half a percent. That raises your monthly payment $35 on a $250,000 loan. To save that $35 per month, your lender may charge you $6,250 (a quarter point) up front! You won't make up for that higher upfront cost for nearly 15 years. If, instead, you paid the higher interest rate and put that money in a savings account, you'd make about $2,000 over the life of your mortgage.
That said, ignoring your mortgage rate until the day before closing is also unwise. Your lender needs time to put together the paperwork for your loan. Ideally, you should get a rate lock sometime between a week and a month before you close. A pre-approval process should give you a good idea of your budget and can help your offer stand out in a sellers' market. An easy closing transaction, instead of trying to time the market, should be your priority here.
How do I lock my rate?
One of the wisest things you can do in the home-buying process is to talk with your credit union representatives to let them know you are starting the process of buying a home. With many years of experience in home lending, they can help you identify some good strategies for determining the right home for you and streamline the process you'll be following. They will also help you get started on pre-approval if appropriate at that time. Then, once you've found the right house and you're ready to make it yours, let them know you are ready to lock your rate. After signing an agreement with your lender for the rate, points and duration, you're all set.
Why should I lock my interest rate?
Locking your interest rate has two big benefits. It helps you prepare your new monthly budget and it helps your credit union get all the necessary paperwork in order for closing. Don't think of your rate lock as a chance to score a deal. You won't save much money. In fact, you could stand to lose quite a bit by trying. Think of it as a T-crossing and I-dotting exercise. Having a rate lock on a mortgage means one less piece of paperwork that stands between you and your new home.
If you'd like more information about current mortgage rates, saving for a down payment, or anything else about the home-buying process, reach out to your neighbors at Destinations Credit Union. Our supportive staff is there to help you every step of the way, from setting a budget to protecting your biggest investment. Call, email, or click your way to Destinations Credit Union today!