Eyal Tropen - Sr. Loan Officer

NMLS # 874253

Interested in Locking your interest?

Question: When is the perfect time to lock interest on a mortgage?

One of the first questions that arise in my conversations with clients is "What interest rate will we get on our mortgage?". In fact, it isn’t possible to know this in advance... By the time we’re ready to lock your rate, it can be very different from current interest rates, and it will be affected by final decisions regarding things like the type & terms of the loan selected, your credit rating, etc. Until we lock, interest rates will continuously fluctuate up or down with market conditions. Since the combination of the interest rate and the loan amount will determine your monthly payments, interest rate fluctuations may even affect your eligibility for a mortgage!

What is “Interest Rate”, and How is it Different from an “Annual Percentage Rate”?

  • Interest Rate is the rate charged for you to borrow the principal loan amount to purchase your home. It can be fixed or adjustable, depending on what type of loan program you choose.
  • Annual Percentage Rate (APR) is the cost of credit, expressed as a yearly rate including interest, mortgage insurance, and loan origination fees.

Interest rates for mortgages can fluctuate and are impacted by economic data, inflationary pressure, the stock market, the Federal Reserve, geopolitics, and other global events.

What is the Rate Lock Timeframe?

There are several options for rate lock timeframes. These include 30, 45, 60 or 90-day options.

It is important to remember that with the recent addition of “Know-Before-You-Owe”, in October of 2015, there are more documentation review timeframes and requirements which must be met along the way. Borrowers can’t just lock in a rate and close three days later, for example. In addition, when refinancing a primary residence, there is an additional waiting period of three days after the final documents are signed. Since lock period cannot expire before the date on which the lender funds the loan, there is a recommended minimum of 15 days lock prior to the final closing date of the loan.

The most favorable pricing for any given rate is generally when you are within the 30-day timeframe, with longer periods carrying a higher cost. So, if for example, you must lock for 31 days - technically you will already be in a 45-day commitment which carries a higher cost than that on a 30-days’. Therefore, from a cost perspective, it generally makes sense to hold off until you are within the shorter lock-in period. However, an exceptional situation may occur when interest rates are expected to rise significantly -

  • While you are looking for a property, and there is a concern that you may not qualify with higher payments,
  • When buying a property that is still under construction which is not predicted to complete for a long time, or
  • When the seller cannot immediately vacate the property.

To help in these situations, we offer programs such as SecureLock, which allow buyers to lock interest rates for more than 90 days at a reduced cost. These programs also include the option of a Float-Down, if long-term interest rates fall, instead of rising.

What Happens if the Rate Lock Expires?

If your rate lock expires, it is possible that you may be able to extend the lock for a fee. If an extension is not possible, you would pay the current market rate, which could be higher. To avoid this situation, we encourage you to work closely with your loan advisor to ensure all documents are submitted in a timely manner. Being responsive and communicating regularly with your loan advisor is critical to keeping the loan process on track.

If the interest-lock period expires, it is usually possible to extend the lock period for a fee (usually up to an additional 30 days). If an extension is not possible, you will have to re-lock at then-current interest rates, which may be higher (in some cases you will re-lock at the worse-case between the current rate or the originally locked rate). To avoid this situation, we recommend that you work closely with your loan advisor to ensure compliance with the schedules as much as possible.

When is a Good Time to Lock Your Rate?

As you can understand, the time to lock the interest rate and the length of the lock period will depend on the circumstances - there is no one perfect answer. You should work closely with the loan officer to make that decision. Be aware that interest rates may change because they are tied to the mortgage-backed securities market, which can be just as volatile as the stock market.

Common misconceptions

Borrowers may have the following misconceptions about locking in rates:

  • If interest rates go lower after locking, I can get the lower rate:

This is not necessarily true. A mortgage lock is a commitment by the lender to extend credit at a certain rate. To meet this obligation, the lender himself simultaneously locks the same amount within the mortgage-backed securities secondary market. While the rate lock protects you against interest rate increases, that does not mean that you can automatically get lower interest rates if rates go down. In some cases, you may be able to float down for a fee, but since this involves an additional cost, the difference in interest rates must be significant in order for it to pay off... If this is a concern, you should consider our SecureLock program which allows you to lock in a rate early and includes a discounted float-down option, so you can move forward with confidence and take advantage of more favorable rates.

  • I’ll postpone the interest rate lock until the last minute and save costs by locking for a shorter period, hoping to catch a good rate at closing.

The benefits of locking the rate early usually outweigh the gamble of waiting until the end. If interest rates suddenly jump, you will monthly payments increase, and you may end up not qualifying for the loan altogether... The question is: What will give you more peace of mind – knowing in hindsight that you locked early and were saved from an interest rate hike, or knowing that the gamble succeeded, allowing you to take advantage of an interest rate drop at a later stage? Alternatively, what would irritate you more - the knowledge that you did not lock on time, and ended up with a higher interest rate, or the knowledge that you locked early and missed an opportunity for a lower interest rate?

You do not need to be an expert on rate locks – your loan officer is a licensed professional, whose job it is to watch the market closely, understand your situation, and help in your decision. While your loan officer is not a fortune teller, and cannot guarantee the perfect time to lock, he can provide excellent advice, and recommend when is a good time to lock according to your circumstances.

If you have any further questions regarding obtaining a prior approval from the underwriter, or other matters related to real estate and mortgage finance, please contact me and I will be happy to post answers. You can also receive discreet consultation, free of charge.

Copyright © 2018. Eyal Tropen NMLS # 874253
Residential Mortgage Loan Originator Licensed in CA, OR, TX, WA

American Pacific Mortgage | NMLS #1850
625 4th Avenue, Kirkland, WA 98033 | NMLS # 1055557
Phone: 425-922-1055 | Fax: 855-549-8730 
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Master Builders Association