Not sure when to lock your interest rate on your mortgage? Here’s a few things to consider in getting the best possible combination of rate and price…
The biggest things that determine the final rate and pricing are:
- loan size
- occupancy
- loan program i.e. Conventional, Jumbo, FHA, VA
- credit score
- property type
- loan to value – loan amount in relationship to appraised value
Of these factors, there are two, by and large that affect rate and pricing the most. Those are credit score and loan to value. These two risk based credit factors have the most likelihood of changing how your rate and mortgage pricing ultimately plays out.
Locking-In At Loan Application
When you lock in your at application, you are basing your interest-rate, loan program and price (price meaning fees or credits for a specific rate chosen) without an appraisal in hand. This scenario can remain unchanged as long as the value you and your loan officer anticipate is either the same or within a healthy loan to value range so as to not cause a price change in keeping the same rate of interest.
For example:
Loan To Value or LTV for short is determined by diving the loan amount into the estimated or appraised value
- LTV 95% =$ charge
- LTV 90-95% =$ charge
- LTV 85-90% =$ charge
- LTV 80-85% =$ charge
- LTV 75-80% =$ charge
- LTV 70-75% =$ charge
- LTV 65-70% =$ charge
The loan to value charges are called loan level pricing adjustments and these charged on every mortgage loan. The way to lower your exposure to loan level pricing adjustments is setting your rate or fee structure conservative approach. This was way if you appraisal comes in at value or higher there is no change. This more specific when refinancing with an rate and price change due to loan to value. Purchases typically do not have pricing changes due to appraisal disparity.
The Role Of Daily Mortgage Rate Movement
Locking in your interest rate upfront is smart financial move if any one of these factors are at play:
- mortgage rates improving or a big bond market rally day (for purchase or refinance)
- current market is supporting a rate and payment where you can financially benefit (for purchase or refinance)
- you know you have so much equity in your home as a hedge against a loan to value price change (refinance only)
Locking-In At Appraisal
Mortgage Tip: any lender who prohibits you from locking a rate until the appraisal comes in does not have your best interests in mind. Pick another lender. You should be able to lock-in a rate anytime regardless of when the home valuation is known.
Locking at this point could more favorable approach especially if the amount out of equity you have in your home is in question or if you might be changing mortgage loan programs or their is concern about rates worsening. A good mortgage professional can walk you through the pros and the cons of locking-in the interest rate upfront or waiting until the appraisal comes in, each borrower profile is different.
Final Thoughts
If you’re buying a home in usually locking-in the interest rate at the beginning of the mortgage loan process is the smartest move as there’s many other factors to be concerned about in the home buying process such as the appraisal, inspections, contractual contingencies and oh yes underwriting. You are more or less under the gun to perform whereas when you’re refinancing it’s more of an elective opportunity not necessarily a necessity.
Ultimately, the choice for locking-in an interest rate is yours. A quality loan officer can walk you through a few different rates and pricing options and determine the recapture analysis so as to make sure you are never throwing good money after bad when buying or refinancing.
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