So, now hopefully you have enough understanding of the market conditions that contribute to mortgage pricing and securing a good rate. Stocks are down and investors are fleeing to the safety of the bond market, which has driven down mortgage lending rates. When this happens everything points to a lock. Keep in mind the timing. Will locking in a rate now give you enough time to close your loan? Because mortgage rate locks are not valid for an indefinite period of time, herein lies the second and equally important aspect of locking your loan.
Mortgage Rate Lock Period
Loosely defined, a lock period is the amount of time the lender guarantees your rate after which you are subject to market conditions or the requirement for an extension. The periods available range from 15 to 360-days and are typically broken down into 15 or 30-day increments. As the length of the lock period lengthens, the lender, who has now committed funds to you, loses the opportunity to lend the money at a higher rate if the market moves in their favor. This opportunity cost to the lender affects the available rate to you, the consumer, in the form of a higher rate or an upfront cost to secure the rate. For example, on a given day, a 30-day lock may be 5%, while a 60-day lock may be 5.25%. Lock periods in excess of 60-days are considered long-term locks and bear a higher rate and a lock fee.
How Long to Lock a Mortgage Rate
The answer to this is simple. You need enough time in your lock to close your loan. A 30-day lock may be priced extremely well on a given day. If, however, your closing is not for another 53-days you will not have enough time and you need to look at the 60-day lock for that day. I recommend taking the date required by your contract and adding a week as a starting point. Next just count back to the day upon which you are evaluating pricing. The resulting number is the minimum lock length that you need.
Putting it all Together
As you can, the choice of when to lock is a somewhat delicate balancing act. On one hand, you need to look at the external factors and determine whether or not they are right. On the other hand, you need consider the internal aspects of your deal and the date by which you need to close. Add to this your personal tolerance for risk and the acceptable cost to secure a rate and you have the formula. Each person’s solution is different and only you can decide, but hopefully with a little knowledge you can, at the very least, make the most educated choice possible.