When Should I Lock My Interest Rate?

One of the most common questions that I get from clients is when should I lock my interest rate.  My answer tends to be pretty consistent.  I almost always advise clients that as long as they are comfortable with the payment at the time that they apply, they should lock in their interest rate.  While everyone wants to lock in when rates hit their bottom, few people ever do. The lowest rates any cycle tend to last for a day or sometimes only hours.  Trying to get the lowest rate in any given cycle can be as much about luck as it is about skilled advice.

The reasons to lock in early are plenty, but chief among them is this;  you’re buying a home that you are going to be paying for over a period of up to 30 years.  Making sure that you are comfortable with your payment is a key piece of creating financial security for yourself.  By locking in a rate at application you are ensuring that you won’t need to start stretching your budget beyond what you had in mind.

When making a decision, it’s also important to know that rates tend to rise more rapidly than they decline.  While news that is considered beneficial to rate markets can have a positive impact on interest rates, price improvements tend to occur over days or even weeks.  When their is negative news for bonds, the effects can be instantaneous.  Consider that when the Fed met in June and announced plans to taper off their stimulus program bonds were up almost 1/2% overnight and a full percent over the next week.  Last week, the Fed announced that they will not immediately start tapering as people had though, and the positive effect on the retail rate market was only about 1/8% overnight, and in the week since, the total price improvement has been about 1/4% to most fixed rate products.

Additionally, given the right circumstances a locked rate doesn’t mean that you can’t take advantage of a falling rate environment.  Many lenders offer what’s called a “float down” option, allowing you to take advantage of any sharp decline in rates that may happen during your transaction.  These options usually require that the market move by at least 1/4% and may have fees associated with their execution, but they can be a great way of giving yourself peace of mind while still allowing you to try to reap some benefits if pricing moves the right way.   Asking your loan officer whether or not your interest rate can be floated down is always a good idea.

Finally, if there is no float down option, you still haven’t necessarily missed the boat.  After closing you still have the opportunity to refinance down the road.    Refinancing can be a low cost or no cost way to lower that rate  in the future, further improving that price that you’re going to be paying for your new home.

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About jasonhecht

Jason Hecht is a 20 year veteran of the mortgage industry and a respected speaker and authority on mortgage related topics.

2 responses to “When Should I Lock My Interest Rate?”

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  1. Locking In Rates | Louisville Kentucky Mortgage Loans - October 2, 2013

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