A mortgage lock can work for you or against you depending upon the terms of the mortgage rate lock in period and upon the current behavior of the economy as seen in the equities and bond markets (stock markets). Because these are common variables, it is not always easy to provide a definitive answer as to whether or not a rate lock makes sense. However, the following discussion should give you a better understanding of the components involved in trying determine whether or not locking in your mortgage rate is the best move for your specific circumstances.
First, it is important that you understand what it means when discussing a mortgage lock, and what benefits you can expect by locking in to a certain mortgage interest rate.
What is a Mortgage Lock?
In simple terms, you lock in your mortgage agreement to a specific agreed interest rate for an agreed period of time while your mortgage application is being processed. It is fundamentally an assurance that once you have agreed an interest rate with your mortgage lender, that rate will neither increase nor decrease until your mortgage papers have been signed.
You can also include the points when you lock in your mortgage, although this is not mandatory. The ‘points’ refer to lump sum charges you can pay to reduce you interest rate, and one point is generally equivalent to 1% of the sum being loaned – i.e. 1% of your mortgage. So if you borrowed $200,000 to purchase your home, one point would equal $2,000.
Should You Lock Your Rate or Not?
Given that your mortgage can take a few weeks or more to complete once you have made your offer backed up by a mortgage from your bank or building society, you will usually not lose with a mortgage lock, although much depends on the financial situation at the time.
In a highly inflationary period, when interest rates are generally rising, it makes sense to lock-in your mortgage to an agreed rate. However, if you are buying your new home in a recession, and prices are generally stable, interest rates tend to drop, and it might be to your benefit to hold out for a lower interest offer.
You are not restricted to what you accept, and you can usually ask for a mortgage lock at any time during the process. In a recession it is likely best to keep your options open and not lock in your interest rate until you see a trend – either up or down regarding interest rates. However, your lender will be doing the same thing, and is unlikely to agree to lock into an interest rate that is liable to increase over the short term.
To take full advantage of a mortgage lock, you are best advised to work with a mortgage professional that has a day in and day out working knowledge of the markets and latest mortgage rate activity, and accept a lock in mortgage rate if you believe that existing conditions appear to indicate a future rate increase.
How Long Does a Mortgage Lock Last?
Mortgage rate locks can typically last around 1 to 2 months. This depends on the lender, and some might hold the interest rate for only 7 days after approval of the loan. Others might go longer – to 120 days or more. Establish the period when you arrange it and make sure that you understand and agree to the terms of the rate lock.
Your lender might charge a fee for a mortgage lock, in which case this sum will likely increase with an increasing amount time for which the rate is held. The period should last until settlement, so before agreeing on a time period find out how long it generally takes for purchases to be settled in your area.
Should You Include Points?
The term ‘points’ refers to a means of reducing your monthly payments by paying a lump sum. Each point has a capital cost, and reduces your interest rate by a certain amount. You can also lock-in the value of each point to a fixed sum so that your lender cannot make up for any loss in interest payments by increasing the points charge.
You can lock-in your points and interest rate or just take a mortgage lock with floating points. Before making this type of important decision, you should first seek the advice of an independent financial advisor who is on you side, and not working for your lender.