How To Lock In The Perfect Mortgage Rate

If you talk to various mortgage lenders about spotting the lowest rate, they will all give you different advice. Some experts will say that the beginning of the week is the best time whereas others will suggest the end of the week. When it comes to timing, there is not right or wrong answer – especially since rates alternate daily and are subject to unforeseen circumstances (i.e. Brexit). However, locking in the right rate does not purely rely on luck – with the right knowledge you can recognize good timing and increase your chances of acquiring that perfect rate.

The first step is having a thorough understanding of how rate locks work. A rate lock gives you the security of a fixed interest rate for a specific amount of time, which typically lasts from 10 to 90 days. Mortgage lenders charge you a fee for a rate lock. Generally, rates with longer duration cost more since it is giving you a longer security from increasing rates in the future. The cost of rate locks is valued in a point system:

1 point = 1% of the loan amount

The more points you purchase, the lower your rate will be. For instance, if you decide to lock in at 3% rate for 90 days and the rate doubles up to 6% during your lock period, you are still qualified to the 3% rate you locked in.

Now, what happens if the rates actually drop during your lock in period? In this scenario you have two choices:
1) Float down – This is an option that mortgage lenders offer you for a fee at the beginning of your lock-in process. With a “float down” option, you can reset your lock to a lower rate during your rate lock duration.
2) Find a new lender to lock – Many mortgage lenders are reluctant to renegotiate when rates drop and some do not even offer the float down option. In this case, you might want to find another lender. A general rule of thumb is, do this if you can cut your rate by 25 basis points or more (+0.25%). Finding a new lender can be complicated and if your loan does not get processed within the time frame, you’ll end up giving up that lower lock-in rate.

Keep in mind that unless there’s a dramatic drop, it’s not worth renegotiating your rate over a small decrease.

The biggest challenge is finding the right time. There are many unforeseen economic events that cause rates to peak or plunge – a current example is Brexit. After Britain decided to leave the European Union, American mortgage rates dropped by 125 basis points (0.125%) in one day. The departure drove investors around the world to secure safe assets (i.e. US mortgage bonds), causing the rates to drop dramatically.

While events like Brexit are unpredictable, all professionals concur that certain times of the year are the best to secure a rate lock. If you are looking for that perfect rate, make sure you watch out for the following dates:
• The first Friday of every month after US Bureau of Labor Statistics releases its job report.
• The second day of policy meeting that the Federal Reserve holds. These meetings last two days and buyers should lock on the second days. At the end of the second meeting, the Fed usually releases a statement with a rate-favorable announcement that can lead to decrease. The remaining policy meeting dates for 2016 are:
o July 26-27
o September 20-21
o November 1-2
o December 13-14

There are many unpredictable challenges that come with locking in the perfect rate, but knowing how rate locks work and following the economic trends can help boost your chances of obtaining the best number possible.

Sources

themortgagereports.com/21101/perfect-time-lock-mortgage-rate
money.cnn.com/2016/06/30/real_estate/mortgage-rates-brexit
federalreserve.gov/monetarypolicy/fomccalendars.htm