You signed a purchase agreement on your dream home, researched today's best mortgage rates, and qualified for a home loan. Just when you thought the hard part was over comes a conundrum: should you lock in the mortgage rate?
Mortgage rates fluctuate from week to week, and not even the wisest Wall Street maven can know for certain what mortgage rates will be by the time your loan closes. If you lock in, you risk losing out on savings if rates go down. If you don't lock in, you risk getting stuck with higher mortgage payments if rates go up.
Mortgage Rate Fluctuations: Small Change, Big Difference
What makes this a nail-biter is that small rate differences can add up to big money over the course of a loan. At several times this year, for instance, average mortgage rates fell to about 5%, only to rise by a half percent or more in the weeks following the dip. In such a case, a rate rise from 5% to 5.5% on a 30-year, fixed-rate mortgage for $150,000, would translate into about $17,000 in additional interest cost over the life of the loan.
So what should you do? Consider the following:
• Keep up with the latest financial news, get the latest mortgage rate statistics and trends from HSH.com and check HSH's two-month mortgage rate forecast. Decide which gamble makes the most financial sense for you. When rates are close to historical lows, most buyers choose to lock in, rather than betting rates will go down further.
• Find out how much it will cost. Lenders often let you lock in the rate for free for 30 to 45 days; however, they might charge a fee, typically .5% of the loan, for locking in for 60 days.
• Get your mortgage rate lock in writing. Don't settle for verbal assurances from your lender, and make certain you get details on what will happen should the rate lock expire.
• Watch the clock. If you're within a week of the lock-in expiring, confirm that your closing will occur on time. If there is any doubt, ask if the lender will extend the lock-in period.
• Our advice, more often than not, is lock your rate. Simply stated "If you can't afford to lose, you can't afford to gamble". Mortgage rates are notoriously fickle, and tend to rise much more quickly than they fall. That being the case, if a small rise in rates is enough to ruin your chance at refinancing or buying a home, you should strongly consider locking in the rate which will make your deal work, no matter what it might be.
You can hedge your bets, too. If you think rates may fall in the next 30-60 days, ask your lender about a "float-down" option. For what is usually a small fee, you can lock in today's rate, but if rates actually do decline, you can re-lock at the new, lower interest rate.
Learn more about the lock-in process with HSH.com's A Consumer's Guide to Lock-Ins.
Barbara Marquand is a freelance writer who writes frequently on business and personal finance topics.