Interest rate lock can protect you from future hikes

Contact your lender about a lock-in on your interest rate

The process of buying a home is a complex one and it can be particularly intimidating if you are a first time buyer. There is a lot to know and many of the people in the lending industry automatically assume that you know how things work. In the case of our own mortgage, for instance, the lender automatically assumed that we knew to meet at the title company for the closing. Imagine their shock when we showed up to close at the lender’s office instead - 50 miles away from where we were supposed to be!

One of the things that lenders automatically assume that borrowers know about is locking the interest rate before closing. An interest rate lock is an agreement between the borrower and the lender to guarantee a particular rate at closing, even though closing may be 30-90 days away. Different lenders have different policies, but in a time when rates may be volatile, the ability to “lock in” a particular rate ahead of time could save you thousands of dollars over the life of the loan, especially if rates continue to rise.

When rates are low and stable, few borrowers worry about them. But when rates rise, as they have been for the last two years, an increase in the expected rate can mean a higher payment. If you are already buying near the top of your range of affordability, this could be a problem. Lenders have helped to assuage the fears of borrowers by permitting them to “lock-in” the rate ahead of time. It’s a way to assure the borrower that the interest rate that he or she pays will not increase beyond a certain amount.

Here are some things you should know about interest rate lock-ins:

• Ask your mortgage lender ahead of time under what circumstances they will permit you to lock the rate. Some lenders give you 30 days maximum; that means that you cannot lock the rate until 30 days before closing. At any time within that 30 day window you should be able to contact your lender and ask them to lock-in the current rate for you. Your lender should be willing to do this in writing; thus insuring that the agreement is binding.
• Some lenders will agree to longer periods, perhaps of up to 90 days. You may have to pay a fee to lock beyond a certain point. For instance, a 30 day lock may be free, but a 60 day lock may have a fee associated with it. Some lenders will credit this fee at closing; others will keep it or attach it to your loan’s closing costs.
• Keep in mind that a lock is a double-edged sword. It is certainly nice to see interest rates go up after you lock the rate. It’s a bit frustrating, however, to see the rates go down after you have agreed to pay a certain rate of interest. In times of wild swings in the rates, a lock can help you or hurt you. Be careful when you use it if the rates are a bit volatile.

On the whole, the ability to secure a particular rate of interest is a useful tool for home buyers. You should ask your lender about it and for their particular polices ahead of time so that when your are ready to secure your rate you will know what to do and how to do it. It pays to be informed.