Home Mortgage Refinancing | When Should I Lock My Interest Rate?
When homeowners choose to refinance their existing first mortgage loan, they must decide when to lock in their interest rate. Submitting your loan application does not necessarily lock in your rate. With mortgage interest rates low in 2009 and many borrowers refinancing locking or floating is again an important issue to understand when applying for a loan.
In the same way people try to time the stock market - deciding when to buy and sell stock in companies - many borrowers try to time when they lock in their rate when refinancing. Based on the history of mortgage interest rates, this strategy usually backfires.
Many borrowers literally wait for months or years for lower mortgage rates because they only want to refinance if they can get the absolute lowest rate. Usually, they miss out on savings while they wait. For example, if borrowers can save $200 per month by decreasing their rate from 6.5% to 5.25%, they should focus on the savings they can get, not on the small amount they might be missing because rates are not at 5.125%. Our advice is that if a refinance makes sense with current rates, the borrower should consider one right away.
You can always refinance again only 6 months after you close on your refinance if rates drop and you want to do it again.
The scenario that gets played out over and over goes as follows: Interest rates drop and then everyone rushes to apply to refinance. Some borrowers see good rates, apply and lock in. Those borrowers are very happy two months later when they are making lower payments on their loan. Other borrowers apply but hold off on locking in a mortgage rate. More often than not, interest rates spike back up sharply and they wait around hoping for lower rates.
If you look at a history of mortgage rates since 1980, you will find the same pattern: mortgage rates tend to decrease very slowly, lulling borrowers into the feeling that rates will stay low for long periods. But when rates increase, they tend to spike up extremely quickly - often in hours. By the time you find out that interest rates are increasing, it is already too late to lock your rate at the lower rates from yesterday.
Consumer Checklist for Mortgage Rate Lock-Ins
- Get all rate locks in writing or by e-mail. Make sure the rate lock shows the loan program, the interest rate and the total points if any on the loan. For adjustable rate loans, make sure all index, margin and cap information is included.
- Anything that is too good to be true is! If one lender seems much lower than all the others, approach with caution and get it in writing.
- If lock-in fees are required, get written confirmation of how those fees will be refunded or credited at closing.
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