There’s no easy answer. The best choice will vary in different markets and different lenders. Borrowers willing to gamble might forgo the lock-in process in hopes rates will fall before the loan is final. Others want the peace of mind a lock-in provides.
With rates fluctuating only small amounts week by week, it will pay to look at the actual dollars involved rather than to fixate on saving a fraction of a percentage point.
To back up for a second, locking in means getting the lender to commit to a specific interest rate if the loan is approved within a set period. Many lenders charge nothing to guarantee a rate for 30 to 60 days. To lock in for 90 or 120 days, the lender may charge a fee, typically 0.25% to 0.5% of the loan amount, or $750 to $1,500 for a $300,000 loan. A lock may or may not include the number of points the borrower must pay.
Locking in is especially important when rates are likely to rise. But it can backfire on the borrower if rates subsequently fall.
Currently, the rates on the most desirable form of loan, the 30-year fixed-rate mortgage, average about 5%, according to the BankingMyWay.com Survey. That is such a low rate it’s very unlikely it will drop significantly. Over the long term, the odds favor rates going up rather than down. But rates have been relatively stable recently, and the Federal Reserve is working to keep them low, so it doesn’t seem likely rates will rise significantly over the next 30 to 60 days, the time it typically takes to get a mortgage approved.
On the other hand, even a small rate hike can cost a lot over the years. A $300,000 loan charging 5% would cost $1,610.46 a month, according to the Mortgage Loan Calculator. At 5.25%, it would cost $1,656.61. Over 30 years the difference would amount to $16,614.
It is not at all uncommon for rates to change by 0.25 percentage points over 60 days, and rates were just shy of 6% as recently as June.
The key problem is that even if you lock in for a lengthy period, such as 60 or 90 days, there is no guarantee the deal will close by then. So the first step is to ask the real estate agent and lenders how long mortgage approvals are taking. The time can fluctuate as the lender's workload goes up and down. Some reports say tighter scrutiny of applicants and more scrupulous property appraisals are making the process longer for many lenders.
You may find identical rates from Bank of America (Stock Quote: BAC) and Wells Fargo (Stock Quote: WFC), but discover that one is approving loans faster than the other. Talk to the local branch that will handle your application, not to the national headquarters.
Also ask if the lender offers a “float-down” option that would automatically give you a lower rate if they fall.
Whether you settle for the free lock-in period or pay for a longer one, do everything you can to speed the approval process. Have all the required documents in hand before applying, including the purchase contract and W-2 forms and other proof of income, as well as documents showing all your outstanding debts. The lender can provide a complete list.
Finally, be available to handle the unexpected. With all the paperwork, documents go missing and signatures are overlooked. Don’t wait for the mail, deliver documents in person or with an overnight service.
And don’t wait for someone to tell you there is a problem. Follow up to be sure each document you have sent has been received, and contact the lender at least once a week to be sure everything is on track.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.