After you get the VA pre-approval or even approval, you still have another big decision to make – when do you lock the interest rate?
Unfortunately, there’s no cut and dry answer regarding when a rate should be locked. Each person will differ. In this guide, we’ll cover what it means when you choose your rate and what you have to do to be eligible to do so.
What Does it Mean to Lock the Interest Rate?
Locking the interest rate means that you chose a rate and it’s now yours. No matter what interest rates do from here on out, it doesn’t affect your loan. This means if the rates go up, you have an advantage. It also means that if rates decrease, you are stuck with the higher rate. It’s like an insurance policy, but of course, it can work against you if rates do drop.
Because interest rates can change multiple times a day, it can be rather nerve-wracking choosing the right time for a locked rate. Once you decide you are ready to stick with the given rate, you have to let your lender know that you want to lock it in – they cannot choose your rate for you. They can only suggest that you lock if they feel rates may increase.
The Rate Lock Rules
Unfortunately, you cannot lock an interest rate just because you like the rate. You have to make sure certain things are in place in order to do so.
- You must apply for and be approved for the mortgage you need. A pre-approval is not enough; you need a full approval with a loan in processing.
- You must have a fully executed purchase contract if you are buying a home. If you don’t have a property secured yet, you cannot choose your rate.
- You must have a closing date within the lock period you want to take. If your rate lock expires before you close on the loan, you could lose the rate you wanted.
How Low Can You Lock an Interest Rate?
It’s up to you how long you lock your interest rate for. Generally, you’ll want the date to coincide with the closing date of your home purchase. If you are refinancing, your lender can let you know how long you should anticipate the processing taking. You can then decide on the date accordingly.
Generally, the longer the period you freeze an interest rate, the more it costs. You won’t pay cash; though, it’s in the form of points. This will vary by lender too. For example, you may be able to get one rate for no points, but if you want a lower rate, it may cost you 0.5% or even 1% of the loan amount.
The Right Time To Lock
So this still begs the question – when is the right time to lock? If you have all of the pieces in place including the application and the executed purchase contract, you are good to lock at any point. Now the rest is up to the market, your feelings, and chance.
If you have a feeling that rates will increase, it’s best to secure your lower rate while you can. This way you don’t have to worry about increased rates and a higher payment. This is especially important if your debt ratio is close to the allowed maximum. Even an 1/8th of a percentage change in the rate can make a difference in your approval. In addition, 1/8th of a point over the course of 30 years can make a significant difference in the total interest you pay over the life of the loan.
What if the Lock Expires?
Sometimes borrowers run into obstacles that cause a delay in the closing process. While a delayed closing is difficult enough, losing the rate could be even worse. You’ll generally have two options in this case:
- Pay to extend the lock – Some lenders allow you to pay to extend the locked in rate. The amount it costs will vary by lender. Before you commit to a lender, you should ask about their policy if a locked in rate expires. This way you’ll know the worst-case scenario should it happen.
- Take the market rate – If you cannot pay to extend a locked rate, you are subject to the market rate. This could be good or bad, there’s no telling. If rates are lower, you lucked out. If they are higher, you have to make sure you still qualify for the loan.
Making the Choice
When it comes down to it, you have a lot of factors to consider before you lock in a rate. Finding the right time means having good communication with your lender. They should know before anyone else when rates are about to increase. A simple head’s up can help you lock in the rate you want before they increase. Of course, you have to do your legwork as well. Staying on top of the rates and deciding when you are ready to just bite the bullet is a personal decision.