Being a property owner brings you financial responsibilities. Ideally, you’re looking for the lowest rates for your mortgage, which would help you save more of your money. However, given that the interest rates are unpredictable and dynamic, even a small rise can end up draining more resources from your pocket over the entire span of your loan.
Remember that mortgage interest rates undergo daily fluctuations. Therefore, it would be a logical move to lock the variable rate when they are low. Some lenders allow locking the rates in variable schemes. Before you choose the lender, visit this site and talk to the experts regarding the choice of these creditors.
What Does Mortgage Rate Lock Mean?
A mortgage rate lock refers to an agreement between the lender and the borrower. Through this agreement, borrowers can lock the rate of their variable rate interest for a specific time. This implies that regardless of the movement in the market, your interest would be calculated based on the locked-in rate for the specific time.
In a nutshell, locking the rate ensures greater security financially. When you take the loan, the best market rate might not be available. However, when you lock the rate, you can pay the interest at a lower rate. Of course, your lender would charge an amount when you lock in the rates. A calculated decision on your end can help you make significant savings.
What Would Happen If You Don’t Lock In The Variable Interest Rate?
Failure to lock in your variable interest rate implies that you would be paying a higher amount of interest over time. However, you may have to shell out a higher amount as a down payment. You would have to pay a lower interest rate when you pay this upfront fee since the initial payment would be higher.
For instance, if you have taken a loan of $200,000, and the interest rate rises to 5.5% from 5%, the difference in interest payment can amount to $60 a month. Therefore, during the entire loan term, you would have to pay $22,000 more.
Without locking your interest rates, you won’t know the exact amount you need to shell out each month.
How Rate Lock Works?
Check out how a variable rate lock works with this VA Loan Calculator.
Increasing Interest Rates
In case the interest rate starts increasing, borrowers need to lock the rate immediately. This implies that you keep paying the interest at the locked-in lower rate although the market rates increase. Evidently, your interest payment would remain independent of where the market rates go.
Decreasing Interest Rates
When the market rates start dropping, borrowers with locked in-rates will fail to take advantage of the situation. This is one of the drawbacks of locking in variable rates.
Constant Interest Rates
In case there is no change in the interest rates, and you lock the variable rates at a reasonable percentage, the situation might frustrate you. The reason is, lenders charge a fee for locking the variable rates. So, ideally, the situation would benefit you only if the market rates increase after you lock in.
How Can You Lock In A Variable Interest Rate?
The mortgage rates would directly decide your monthly payments, so you need to find the lowest interest rate. Once you find the lowest variable rate, you only need to lock-in. This is how you can lock in your rate of interest for a variable-rate mortgage.
Know The Timeframes
You might have a discussion with your lender regarding the time when you can lock the rate. Typically, you need to submit your application or go for a float-down system.
Know The Costs
Make sure to know the charges you need to shell out when you lock the interest rate. Sometimes, you might want to extend the lock. Also, be aware of the fees and formalities and whether the lender would refund the fees if the lender cancels the application for the mortgage.
Decide The Lock Time Frame
It’s crucial to know the timeframe of the lock period, as you may have to prioritize your financial decisions. In general, the lock agreement must cover the span till you close on the home. Besides, you may want to have a few days in addition as a buffer.
Keep An Eye On Mortgage Rates
As the homeowner, you need to check out the market rates. This ensures that you are on track with the market conditions. Your loan officer or real estate agent can sometimes give an insight on whether they are likely to fall or rise—however, the decision to lock in lies with you.
Make Your Decision
In general, borrowers request the variable rates to be locked in when they start rising. If the rates are higher but are likely to drop, wait out the phase for a better deal. When you reach out to the agent, specify the timeframe you want the rate to be locked.
When Would It Be Ideal To Lock In The Rate?
Typically, you may consider locking the variable rate when you apply for the loan. The reason is, the rates might increase shortly after you start paying the monthly EMIs. However, if you are ready to take risks and gamble a bit, you may start with a variable rate and wait until it drops further.
In this case, you need to submit the lock-in application at a later date. However, choose a lender who would allow you to lock in the rate later, as not all the creditors provide this facility.
In case you find that the interest rates are dropping after you have locked in the variable rate, withdraw the current application and get initiated with a new one. However, you would make some losses, considering the charges you had already paid in the past.
Again, you need to shell out a higher processing fee. Therefore, it is recommended to seek professional advice from experts before you make the final call.