- Always Lock Your Mortgage Rate
- Choosing a Mortgage Rate Lock Period
- When to Lock Your Mortgage
- Can Mortgage Rates Change Once Locked?
- “Should I lock my mortgage today?”
- What If My Rate Lock Expires Before Closing?
- Ask for a Rate Lock Extension
- Rate Lock Break Option
- Get the Mortgage Lock in Writing
- Watch Out for Changes to Your Mortgage Rate
- Should I Refinance My Mortgage Now?| NextAdvisor with TIME
- What New Lower Interest Rates Mean for You
- Why You Shouldn’t Refinance Now
- Economic Stability
- Worsening credit score
- Stricter requirements
- History of late payments
- Inconsistent job history
- A longer wait
- Is Now a Good Time to Refinance?
- When Is It A Good Idea To Refinance Your Mortgage?
- When it’s a good idea to refinance your mortgage
- What is a cash-out mortgage refinance?
- How long does it take to recoup the costs of refinancing?
- How to calculate your break-even point for closing costs
- Example of a mortgage refinance
- How long does it take to refinance a mortgage?
- Learn more:
Always Lock Your Mortgage Rate
A “mortgage rate lock” is essential to ensure you actually receive the interest rate you are quoted by a bank or mortgage broker.
When you purchase real estate or refinance an existing mortgage, you’ll need to lock in a mortgage interest rate at some point during the loan process. You can do this early on or later in the process, depending on your preference.
While comparing lenders, you’ll you be presented with a mortgage rate quote, but it will mean very little until it’s actually secured, or “locked,” by a bank or lender.
It’s kind of a car dealer telling you a price over the phone, then you show up at the dealership and the price is a lot different for whatever reason. Until you have it in writing, it doesn’t mean much.
When you lock in a mortgage rate, you are guaranteed that interest rate, assuming your loan actually qualifies under said lender or bank’s guidelines. And as long as you close by the lock expiration date.
By locking your home loan, you secure a specific interest rate along with certain terms, including the mortgage index and margin the program is tied to, the prepayment penalty if any, and the initial, periodic, and lifetime caps.
Most lenders don’t charge a rate lock fee, but they’ll often ask for a deposit at the time you lock for the home appraisal as an indirect means of making sure you’re committed to the loan application.
For example, if you lock with them but then decide to use a different lender, it would cost them, so they want some assurances.
Choosing a Mortgage Rate Lock Period
- 15 day
- 30 day
- 45 day
- 60 day
- 90 day
When you lock your loan, you must also choose a rate lock period, which can range from 7 days to 90 days or even longer. In fact, loanDepot recently introduced a 150-day rate lock. But the most common lock period is anywhere from 15-45 calendar days, which is the average time it takes for a home loan to close.
For example, if you agree to a 15-day lock on December 6th, your lock will expire on December 21st. If you do a 30-day lock, it will expire on January 5th.
The longer the lock period, the worse the pricing will be, all else being equal, because it’s risky for a lender to offer a guaranteed rate over time.
While the mortgage rate may not be different the lock period, the closing costs will most ly vary. So you might find yourself paying more in closing costs for a 45-day lock vs. a 15-day lock.
It’s important to pick the appropriate length of time to ensure you get the loan closed (funded) before the lock expires, without subjecting yourself to additional fees.
Either way, you will always have the opportunity to extend your rate lock at a relatively small cost if the process gets delayed, which it often will!
When to Lock Your Mortgage
- There is no universal answer here
- Since it’s always a moving target
- the current interest rate environment
- And the amount of time until your closing date
Some borrowers may choose to lock in a mortgage rate at the initial time of the loan application, before the loan is even submitted to the underwriting department.
This is known as a “pre-lock,” and ensures the interest rate is set before the loan is even underwritten.
It can be helpful to pre-lock your mortgage rate if the debt-to-income ratio is close to the maximum, so if there are any interest rate fluctuations, the DTI won’t be exceeded.
It could also be a smart move if mortgage rates are rock-bottom and there is little expectation for rates to improve further.
However, this option is typically only available on a refinance or for a purchase loan that has has a fully executed purchase contract.
If you’re simply shopping for a home, a pre-lock probably won’t be an option.
Others may float their mortgage rate and lock their mortgage at the last minute, effectively gambling on the hopes of mortgage rates improving later in the loan process.
If you feel mortgage rates have more room to fall, this could be the way to go. But as mentioned, it’s a gamble and there’s no guarantee.
You can typically lock your loan Monday through Friday during normal business hours, which tend to mirror market hours.
Some lenders may allow a lock on a weekend, but the pricing will ly factor in the uncertainty of the week ahead.
Can Mortgage Rates Change Once Locked?
- Once you’re locked, the interest rate won’t change
- So even if rates rise after the fact
- Your low rate will be honored
- However, if rates fall, you won’t get to take advantage
- Unless the lender provides a float-down option
Nope. Once you lock in your rate, your rate cannot change as long as your loan funds before the lock’s expiration date.
For example, if you lock in a rate of 3.75% on a 30-year fixed mortgage and rates shoot up to 4.5% over the next week, you can give yourself a pat on the back.
Those who didn’t lock will have to contend with the higher rates, but you can rest assured that your rate won’t change.
However, it’s also possible for mortgage rates to drop after you locked. In this case, you might be perturbed, but again, your rate won’t change, or improve in this case, either.
In that sense, you’re taking a risk by locking on a certain day. For the record, there is no special day to lock, or a better day to lock than others.
It’s asking someone what the best day to buy stocks is. Plenty of opinions I’m sure, but no one really knows.
“Should I lock my mortgage today?”
If you’re asking that very cliché question, consider the following:
- Are you happy with the rate and fees being charged today?
- How much do you stand to gain if rates improve?
- How much time do you have before you must lock in order to comply with all lender timelines?
- Could a rate spike jeopardize your loan entirely?
- What’s the current rate trend? Is it your friend?
- Is any big economic or geopolitical news on the horizon?
- Do you to take risks?
As a rule of thumb, the longer you have until the close of escrow, the more chances you have of mortgage rates improving.
Conversely, if you only have a couple weeks before you close, you’re taking more of a risk by floating your rate.
Put simply, mortgage rates tend to rise and fall all the time, and if you have a longer period of time to float, there’s a better chance you’ll see a favorable day or two to lock in a great rate.
This is why it may not make sense to lock well in advance.
For example, if you have a 45- or 60-day escrow, you’ve got a lot of time to watch rates and see how things go.
It might be prudent to just take a wait and see approach, especially if mortgage rates jumped higher in recent days or weeks.
The ebb and flow might benefit you if a long period of rising rates suddenly reverses course.
It’s kind of buying airline tickets. Imagine you’ve got three months before you trip. You have time to sit and watch fares to see if they come down. And even if they go up, they might come back down again.
If your flight is in two weeks, you don’t have that luxury, and could wind up with an even higher fare if you push it to the last minute.
Ultimately, it’s your choice and will be dictated on your risk appetite and/or if you’re satisfied with where rates are on a given day.
Think it through and try not to be too impulsive. No one know with certainty if rates will go up or down tomorrow, next week, or next month.
What If My Rate Lock Expires Before Closing?
- You generally have several options here
- Including a lender courtesy to extend the lock a few days for free
- Or you can pay a lock extension fee if you need more time
- Which will increase your closing costs
- But ensure your original rate is honored
As mentioned, mortgage locks don’t last forever, they come with a set time period.
Assuming you lock your rate in early on, there’s a chance the rate lock period could be exhausted, at which point the lock could expire.
If the rate expires before loan closing, you’ll need to get it re-locked. This could entail worst-case pricing (assuming mortgage rates have risen) and a relock fee.
For example, if rates went down, you’d be stuck with your old, higher rate and a relock fee to boot.
Ask for a Rate Lock Extension
- If time is running out
- Be sure to discuss an extension before the lock actually expires
- To ensure your original pricing is honored
- Ideally the lender will extend it a few days for free if that’s all you need
But typically the lender will keep an eye on the rate lock period and issue a “rate lock extension” before the lock actually expires. Doing so will ensure you get to keep the rate you originally signed up for.
However, rate lock extensions don’t come for free either. If it wasn’t the lender’s fault, the cost of the rate lock extension could run you several hundred dollars or more, depending on the associated loan amount.
It is calculated as a percentage of the loan amount. So you might be charged .125% for a 7-day lock extension, or .25% for a 15-day extension. These fees will vary from lender to lender and could be more or less.
The higher your loan amount, the higher the cost. On a $200,000 loan amount, you’d be looking at a cost of $250 or $500 to extend the lock period, respectively.
While that fee sounds a raw deal, holding onto a rate that is an .125% or more lower could save you a lot of money over the term of the loan.
In other words, it’s better to get the extension than let the lock expire for fear the rate could rise.
If the delay happens to be the lender’s fault, they will generally offer a free rate lock extension for seven days good faith.
This should be enough to get the loan closed without any cost to you. Even if it is your fault, you might be able to get a few free days to ensure the loan closes before the lock expires.
In any case, you can try to negotiate a lock extension in your favor, and ask them to extend it for free if you feel it was your hands. They may work with you to retain your business and avoid you going elsewhere.
Rate Lock Break Option
- You might be offered a rate lock break
- Assuming mortgage rates fall substantially from the time you locked
- This could give you the opportunity to snag an even lower rate
- But there is usually a cost involved so make sure you plan to keep the loan for a while
Some lenders may give you the option to “break your lock” if rates substantially improve after you lock.
However, this option will come at a cost. For example, say you lock in a rate of 4.625% and rates all of a sudden fall to 4%.
The lender may let you execute a rate lock break whereby you get a rate of 4.125% (an eighth over the prevailing market rate) at an additional cost in the way of discount points.
In other words, you’ll wind up with a lower rate than what you originally locked, but you won’t get quite the lowest rate currently available, nor will you get it for free.
You’ll pay some fraction of a point to get it, perhaps a quarter or half a point.
Then once you break even on that initial upfront cost, you can save money via lower monthly mortgage payments year in and year out.
Get the Mortgage Lock in Writing
- Always get your lock in writing
- By asking for a rate lock confirmation
- And keep the paperwork in a safe place
- In case anything comes up along the way
Either way, it’s important to stay on top of your mortgage rate lock, and to make sure you have the rate and terms in writing.
Never just assume a mortgage broker or bank has locked your interest rate.
They may say your rate is this or that, or that it’s locked, but in actuality they may be floating your rate in the hopes of getting a better commission or yield spread premium.
Or perhaps you’ve been misquoted, and they’re praying the mortgage rate will come down to what they originally quoted you.
I’ve seen that happen a million times. Brokers will go into panic mode if they failed to lock a rate initially, often after quoting their borrower a guaranteed rate.
They’ll call the mortgage lender each day to see how mortgage rates have moved, and nervously push on day after day, waiting for the moment rates fall to the level they were initially quoted.
Sometimes brokers will settle for a lower rate with less commission to them, but often they’ll simply tell the borrower the rate is higher for some reason.
And the borrower will just have to accept it because they’ve spent so much time working on the loan that they’ll just want to get it done.
Watch Out for Changes to Your Mortgage Rate
- Always beware of a possible bait-and-switch
- Where you’re quoted a low mortgage rate initially
- Then later told something entirely different
- Also pay attention to loan costs, terms, and so on
Some unscrupulous loan officers and brokers may even change the original terms they quoted you to produce a lower rate.
Such as raising the margin, adding a prepayment penalty, or changing indexes, caps, or even loan programs.
They may also tell you that mortgage rates increased since you were first quoted. This might be true, but it could also be baloney.
Keep an eye on rates yourself to see what’s going on in the market to avoid getting taken for a ride.
In summary, make sure you know exactly what you’re getting when it comes to the interest rate and terms associated with your mortgage rate lock.
Any mistakes here will lead to higher monthly mortgage payments for years to come, or a major headache if you fail to jump on a good rate early on.
Sure, you can gamble, but if you’re happy with a certain interest rate, might as well not take chances.
And again, always get your lock confirmation in writing from the bank or broker before you proceed with the deal! This cannot be stressed enough!
Should I Refinance My Mortgage Now?| NextAdvisor with TIME
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If you’ve got a mortgage, it’s almost definitely one of your biggest financial burdens. And with mortgage interest rates near historic lows right now, this could be an ideal time for you to seize the opportunity to refinance and save.
The low rates we’re currently seeing are a small silver lining of the COVID-19 economy. In an effort to shore up the market and encourage home buying, the Federal Reserve slashed interest rates, and mortgage rates followed suit.
At the end of April, they sat at an all-time low. Right now, the average interest rate for a 30-year fixed-rate mortgage is 3.23%, while a 15-year fixed-rate mortgage comes with an average interest rate of 2.77%. People are paying attention, too: Over a single-week span in March, mortgage applications increased by 55.4% compared to the week prior.
Clearly, those rates don’t exist in a vacuum, though, and refinancing only makes sense if it fits in context with your overall financial picture.
And while personal finance experts say that a refinance could save thousands of dollars over the long-term for the right people, they’re also raising a big red flag. In order to secure a refinance that’s worth your while, you need to measure up to newly strict lending requirements.
That means you’ll need to be able to prove a steady income, a challenge many will face with the economic uncertainty COVID-19 continues to create.
What New Lower Interest Rates Mean for You
Because rates are at a historic low, many homeowners could lower their rates and save thousands by refinancing.
And many are taking advantage of the opportunity. While the mortgage industry usually handles a volume of somewhere between $1.5 and 3 trillion in a given year, experts are projecting that figure will hit $6 trillion this year, says Michael Chabot, SVP of residential lending at Draper & Kramer Mortgage Corp.
Scoring a lower rate, which tends to reduce your monthly payments, isn’t the only benefit. Other perks include:
For more on refinancing and how it works, check out our full guide here.
Why You Shouldn’t Refinance Now
It’s an exciting time to explore the possibility of refinancing your mortgage. But a refi isn’t right for everyone. Here are a few factors that could make it a better idea to stick with the mortgage you have.
When we polled experts and scoured the news, we found one glaring reason not to refinance: the job market’s uncertainty. While refinancing can help you lower your home loan’s total cost across its lifespan, there is a key timeliness component to consider.
Since a refinance is essentially getting a new mortgage to replace your current one, with a whole new set of closing and other loan origination costs, it usually takes at least a few years to recoup the costs and start seeing benefits from refinancing. If you lose your source of income, you could be forced to sell your home or, worse yet, foreclose.
Doing so in the next couple of years will almost definitely prevent you from realizing any benefits from refinancing.
If you’re concerned about your job stability, Chabot advises waiting to refinance.
The refi process can take several months to complete, and that effort will be wasted if you don’t have a stable source of income when you’re ready to sign the papers.
“If you know you’re going to be laid off, I’d tell you not to do it,” he says. That’s because collecting unemployment essentially disqualifies you from refinancing.
Dominic Turano, a senior vice president and loan officer for Atlantic Coast Mortgage, echoes the sentiment. “Lenders are required to warrant that you’ll be able to make the payment on the new loan, and unemployment income isn’t considered stable, recurring income,” he says.
If you don’t feel you have a sturdy foundation under you at your job, you should probably not initiate the monthslong process of refinancing, which can include extensive rate shopping, a home appraisal, and gathering reams of paperwork and documentation.
Worsening credit score
If your credit score has gone down since you originally secured your financing for your home, you may not be able to capitalize on the full benefit of low interest rates.
That said, if your score has only decreased slightly, we still recommend checking on the rates you’d be able to secure your current credit score.
Because rates are so low right now, you may be able to get a lower rate even with a slightly worse credit score. Run the numbers to see if there’s any benefit for you.
If your score has dropped drastically, though, skip it. The hard inquiry required during the refinance process will only hurt your credit score more.
Also, don’t forget you can take strides to improve your credit score. There are very few quick fixes for bad credit, but making changes now helps you boost your score over time so you can be ready the next time a financial opportunity arises.
No surprise here: Mortgage lenders aren’t feeling particularly comfortable in the current economic environment.
To protect themselves, they’re tightening lending requirements from minimum credit scores to more stringent employment verification processes.
Even if you were able to secure a refinance at the beginning of this year, these stricter requirements might make it impossible for you to refi now.
Turano explains, “The coronavirus issue has created a ton of turmoil in the mortgage industry. While rates are low, loan guidelines are changing regularly, and the rules typically governing mortgage-backed securities have also changed.” He adds, “These changes have generally created a more restrictive lending environment.”
History of late payments
Each time you miss a payment, your credit score takes a dip. And in light of the tightening requirements, our mortgage experts say they see across the industry, and chronic late payments aren’t going to do you any favors during the refi process.
Your mortgage payment is not the only bill to stay diligent about, either. Make sure you stay on top of your car payments, student loans, credit card payments, and any other dues.
Set calendar reminders or set up automatic payment to give yourself some protection against forgetfulness.
It will take time for your credit score to recover, but starting to stay on top of your payments now puts you on the path to success.
Before you jump on the refinance bandwagon, take a close look at your income stability. If you’re not entirely secure, think twice before embarking on a refinance loan journey.
Inconsistent job history
“Job stability is a prerequisite to refinance,” says Karen Chiu, a business development manager at the lender New American Funding.
“For individuals with no documentation or alternate documentation for stated income, this is not a good time to refinance,” Chiu says. As lenders tighten requirements around refinancing, she says she expects fewer programs to be available allowing for flexibility in the individual’s income stream.
But if you were furloughed during the pandemic and eventually get back to work, you’re probably going to be in luck. Lenders just want to see proof of income. “As long as you have one pay stub and can prove you’re back to work, you can refinance,” Chabot says.
A longer wait
Chabot points out another potential hurdle to refinancing right now, especially for impatient homeowners.
In regards to the increased volume the mortgage industry is seeing right now, he says, “The industry just isn’t set up to handle that.
” He adds, “The biggest challenge has just been getting loans in, getting them processed and underwritten. Some banks are saying six months to close loans because they just don’t have the resources.”
Is Now a Good Time to Refinance?
Ultimately, to determine if you should refinance, crunch the numbers yourself. “Here’s what I tell everybody,” Chabot says. “I think it’s a good time to refinance if it’s right for your financial situation.” Look for savings of at least a half percent, and make sure you feel extremely confident you’ll be able to cover your new monthly payment for the life of the loan.
Also, don’t feel rushed. Several experts agreed that low mortgage rates will not be going away any time soon.
If you’re not feeling certain about your employment in the coming months, it could make sense to wait until later in the year to explore a refi.
When Is It A Good Idea To Refinance Your Mortgage?
When mortgage rates fall, many homeowners refinance their loans. While refinance activity is up dramatically over last year, that doesn’t mean it’s always the best move. Knowing when to refinance your mortgage is the trick.
When it’s a good idea to refinance your mortgage
Generally, if refinancing will save you money, help you build equity and pay off your mortgage faster, it’s a good decision. With rates this low, even people who have fairly new mortgages may be able to benefit from refinancing.
Consider refinancing if you can lower your interest rate by one-half to three-quarters of a percentage point — this can substantially lower your monthly payment.
Make sure your total monthly savings offset the cost of refinancing, however. It may not be a good idea if you plan to move in the next two years, which gives you little time to recoup the cost.
The question of when to refinance is not just about interest rates, either; it’s about your credit being good enough to qualify for the right refinance loan. Mortgage interest rates are determined by market factors, including the yields on long-term Treasury bonds, and the best rates and terms go to those with the best credit.
Your financial goals, how long you plan to stay in your home, how much equity you have in the home and your overall financial condition are important considerations when it comes to refinancing. Ask yourself the right questions.
There are a variety of ways to refinance your mortgage. Finding the right loan depends on your goals. You may want to switch from an adjustable-rate mortgage to a fixed-rate loan that has a steady monthly payment, or you may want to shorten the term of your loan from a 30-year to a 15-year and save yourself a bundle in interest charges.
A refi is also a way to get rid of private mortgage insurance after you have reached 20 percent equity in your home.
Most homeowners opt for a straight rate-and-term refinance that lowers their interest rate and gives them a comfortable repayment term. Some want a lower monthly payment to free up money for other expenses, such as college tuition or an auto loan.
What is a cash-out mortgage refinance?
Other homeowners go with a cash-out refinance, in which they borrow more than they owe on the home and use the cash to retire credit card debt, pay for home renovations or some other major expense.
Wiping out credit card balances with a lower-interest loan can be a wise move, but if you start racking up card balances again, you’re setting yourself back and increasing your risk. Your mortgage is a debt secured by your home; if you start missing mortgage payments, you could lose your home to foreclosure.
“A borrower should consult with a mortgage professional to determine if their financial needs are best suited for a cash-out refinance vs. other forms of credit,” says Richard Liu, a mortgage consultant for C2 Financial Corp., a San Diego-based mortgage brokerage.
How long does it take to recoup the costs of refinancing?
The interest rate is not the only cost to weigh when you’re considering whether refinancing is worth it. There are costs to close the refi loan, and they can be steep. Expect closing costs to total 2 percent to 5 percent of the principal amount of the loan. If you borrow $200,000 and closing costs are 3 percent of that, you would owe $6,000 at closing.
There’s also a new refinancing fee, effective Dec. 1, which tacks on 0.5 percent of the loan balance to your closing costs if your refi is higher than $125,000. This doesn’t apply to FHA or VA refinances.
Rather than require all that money upfront, many lenders let you roll the closing costs into your principal balance and finance them as part of the loan.
To decide whether a refinance makes sense, calculate how long it will take for the cost of the mortgage refinance to pay for itself. If you plan to sell the house before your break-even point, refinancing might not be worth it.
“If a borrower is refinancing strictly to lower monthly mortgage payments and closing costs are $2,400, the borrower should expect to save at least this amount in interest payments for the duration they plan to have the loan,” says Liu.
To determine your break-even point, divide the total closing costs by the amount you save each month with your new payment.
How to calculate your break-even point for closing costs
Let’s say your new mortgage saves you $192 a month and closing costs are $3,000.
$3,000 / $192 a month in savings = 15.6 months to break even
If you plan to sell the house before you break even, refinancing is not a good strategy.
Sign up for a Bankrate account to crunch the numbers with recommended mortgage and refinance calculators.
Example of a mortgage refinance
Let’s say you took out a 30-year mortgage for $150,000 at a fixed interest rate of 6 percent. Your monthly payment is $899 and over the life of the loan, you’d pay $323,755, including $173,755 in interest.
Five years into the loan, you’ve paid $10,418 toward the principal and $43,541 in interest. Now you want to refinance the remaining $139,581 of your principal balance with a new 30-year fixed-rate loan of 4.5 percent. Using Bankrate’s mortgage refinance calculator, you can figure out whether this would be a money-saving move.
Your new loan would slash your monthly mortgage payment by $192 a month — to $707. Over the life of the loan, you’d pay $254,605, of which $115,024 would be interest. Add in the $53,959 in principal and interest you paid in five years on the previous mortgage and your total cost will be $308,564 — including $158,565 in interest.
By refinancing, you not only lower your monthly payments significantly; you see a long-term savings of $15,190 in interest.
How long does it take to refinance a mortgage?
The time it takes to refinance depends on your lender as well as how long it takes to complete inspections, appraisals, credit checks and other requirements. Many lenders’ websites allow you to read about different loan products, compare interest rates, fill out loan applications and submit documents.
“Within the past few years, technology has streamlined the mortgage process tremendously,” says Liu. “With online applications, mobile document-scanning apps and e-signatures, borrowers can perform most tasks without printing a single document. Most refinances can be closed within 30 days.”
Use Bankrate’s mortgage calculator to compare your own loan scenarios:
- See what happens when you input different mortgage terms (in years or months).
- Reveal the amortization schedule to see how much total interest you would pay.