Do you want to buy a home and you’re wondering when’s the best time to lock your interest rate?

Posted by on Friday, October 24th, 2014 at 4:05pm.

There’s been so much in the news lately about the Federal Reserve Board (“the Fed”) dropping interest rates, it’s no wonder many homebuyers want to take a “wait and see” position when it comes to locking in their mortgage rate. But when the Fed drops rates, the rate they drop is the Federal Funds Rate, which is the rate banks charge each other for overnight loans.

Long-term fixed mortgage rates are not connected to the Federal Funds Rate. So, when the Fed drops rates, it does not cause a corresponding drop in long-term mortgage rates.

Another misconception about mortgage rates is that locking your rate obligates you to that mortgage broker AND to going through with the loan. Neither is true. A lock protects you from rate fluctuation and is simply the lender’s commitment to YOU that, should you go through with the loan, you’re guaranteed the stated rate and stated number of points for a set period of time.

Mortgage rates fluctuate based on a variety of economic data that adjust daily. And although rates currently are low, it’s quite possible for them to spike higher at any moment. The important point to remember is that mortgage rates can go up a lot faster than they usually go down.

Is the gamble really worth it?

Of course everyone wants the lowest interest rate available. But before you wait and see, you should ask yourself if the gamble is worth it, because you may see your rate rise. It’s never fun to get to your closing and discover your rate has increased 1/4 to 1/2 percent. Especially if you were hoping your rate would go down.

It’s always a lot harder to see rates go up and know you could have locked but did not ... than it is to lock your rate and then see them go down. Plus, some lenders—to keep from losing your business—will renegotiate your rate if rates drop after you lock. Just remember you do have to ask. And you probably will get only a portion of the drop.

Although it’s true a small rate change can cost or save you thousands over the life of a long-term loan, research shows a high percentage of homebuyers will sell in seven years. So the important point to remember here is that monthly payments are only slightly affected by small rate changes. On a $200,000 mortgage, a 1/4 percent change up or down translates to a difference of $30-$35 more or less each month. And a 1/2 percent change in either direction is a difference of $60-$65 a month. Because the monthly payment difference is so small, it’s rarely worth the gamble not to lock your rate as soon as you can, if you’re comfortable with the rate as it is. But what does it mean for you to be “comfortable with a rate”?

It means you can afford to make your monthly mortgage payments without having to go without other life necessities. It means you won’t have to eliminate expenditures that add to your overall well-being and happiness or that of your family. So ...

When the time comes … if you’re comfortable with your rate, play it safe and lock. Until then ...

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