Mortgage interest rates can change quickly, and this can impact the amount owed when you refinance your mortgage. A mortgage rate lock can be put in place to protect you from those fluctuations, and will also freeze your interest rate when closing on a refinance. In this article, we’ll take a deeper look at mortgage rate locks, and what they might look like for you.
What is a mortgage rate lock?
A mortgage rate lock is a protection put in place to keep your interest rate from increasing in between the time you apply for a refinance and close on a new loan. If interest rates increase in the time your mortgage rate has been locked, you’ll be able to keep your original rate. However the same can’t be said for when rates decrease, unless the lock includes a float-down option.
What causes mortgage rates to change?
There are a variety of factors that can lead to fluctuations in mortgage rates. The first is economical — when the economy is doing well, interest rates typically increase. When the economy isn’t doing well, the rates become lower in hopes that that will encourage growth. Supply and demand can also be a factor in rate changes. When there’s strong demand for housing, interest rates will be on the higher side. The third factor is what’s called a federal funds rate. This is the rate at which banks and financial institutions borrow money. Because this is controlled by The Federal Reserve, mortgage rates can increase. To ensure inflation doesn’t happen, the Federal Reserve can tap into that federal fund rate. And lastly, mortgage-backed securities can change mortgage rates. When a mortgage is combined with other loans and sold to an investor as mortgage backed securities, investors are paid in return each month when homeowner payments are made.
How can I lock in my rate, and how long does it last for?
The amount of time a rate is locked depends on factors like loan type, location, and which lender you’re using. A typical lock can be 15-60 days. A lock becomes available once your refinance is approved, but don’t jump in too quick. Take a look at how rates have been fluctuating, and be smart. Even the smallest changes can affect your rate dramatically. A good rule of thumb is to lock your rate early if rates are rising, and wait if rates are decreasing.
If you need more help understanding mortgage rate locks, Ken Venick is your guy! With over 30 years in the real estate business, he provides expert knowledge and can put you in the right place for your specific needs. Visit our FAQ page for more info and contact us today.