Many consumers that have refinanced or purchased a new home may have never even realized that their interest rate was locked in at some point during the home refinance process. This is a fairly complicated idea, but nonetheless important. Locking an interest rate essentially means that the interest rate on your home loan is locked at the pricing for that exact point in time. When interest rates increase or decrease after that point in time your interest rate will not be affected. You are truly locking in the interest rate that is available at that particular moment in time.
Never Heard of Locking your Rate?
Large banks and mortgage companies may not even discuss the idea of locking in a rate with consumers. They simply tell you what the rate is and if you accept it they lock that rate, securing that interest rate for you. Large banks and mortgage companies do this for obvious reasons. They do not want to put consumers at risk if the market makes a drastic change in the weeks following your commitment for a loan. The bank also does not want to risk losing your business if the interest rates change. Smaller broker shops and mortgage companies will likely discuss rate locks in more detail with consumers. The reason for this is quite simple. Many brokers have the ability to take your loan to multiple lenders. The broker can lock your rate with one lender and start the process with that lender. A broker can then submit your loan to another lender but float the rate. Floating allows the broker to lock your rate in if rates take a dip. This creates a backup plan for the borrower and ensures that the borrower can take advantage of a drop in interest rates. Brokers will often discuss locking with their clients and let the consumer make the choice. If the borrower wants to roll the dice with interest rates they can do so.
How do you Time the Market?
There is really no such thing as timing the market when it comes to interest rates. Anyone that claims to be able to time the market should have been out of the mortgage business a long time ago. They are likely sipping a drink on their private beach in Maui. There are some benchmarks that consumers may want to wait for such as a fed meeting where the fed is expected to reduce rates. The fed reducing rates typically does not have an immediate or dramatic effect on mortgage rates, but that is a different discussion altogether. Generally speaking locking in a rate is not a huge risk or huge reward either way. Refinance home mortgage rates do not often move dramatically in a 30 day span of time. It is important to realize how much money a small change in interest rate could cost you over the life of a loan. Even a reduction in interest rate as little as .125% can increase the interest that you will pay over a 30 year loan by quite a bit of money. The moral of the story, pay more attention to payment than to rate. If you are happy with the proposed payment on a loan then lock in the rate. If you need to float a rate to get to a payment that you can afford, the chances are that you can’t really afford the payment that you’re trying to get to.
