When you apply for home financing, it may take some time before the loan closes. Loan closings for existing homes may take up to 30 days or more, and closings for new construction may take up to nine months or longer. Although automated loan processing has cut this time dramatically, even a few days may matter in a volatile interest rate market.
Locking a mortgage rate is one way to make sure it will be available when they’re ready to close. Locking simply means that for a specified period you have the lender’s promise to hold the rate while your application is processed. Most locks are good for 30-60 days, although you may be able to lock for a longer period of time in some cases. For the rate to be guaranteed, closing must take place within the specified time.
Customers who choose to lock in want the security of knowing what their rate will be at the time they close. Although not even the most skilled economists know for sure what interest rates will do, those who think rates may rise will be inclined to lock their rate.
“Many customers choose to lock due to the volatility of the market,” says one mortgage expert. “Keep in mind, that unless a rate is locked, it may change due to market fluctuations.”
Is there a downside? What if rates fall after the rate is locked? Will the customer get the benefit of the lower rate?
A lock means exactly that, and the interest rate is locked and cannot rise or fall. In order to take advantage of lower rates, you may want to choose a cap program.
By capping an interest rate you place a ceiling on the rate without locking it. The advantage: rates can fall, but cannot rise above the ceiling for a fixed period. The disadvantage: the initial capped rate is slightly higher than the daily fixed rate.
Customers may rest easier knowing that for a slight rate increase, their rate is protected from rising above the ceiling, especially when they know they’ll get the lower rate should they fall.
Aside from the slight interest rate increase to cap, most lenders charge a deposit to hold a locked or capped rate, but the deposit is often credited back to the buyer at closing.
Of course, you also have the option to float with the market until closing. By floating the you are subject to whatever rate fluctuations may occur.