When it comes to financing, it is important to understand that interest rates move on practically a daily basis. To be assured of a rate, you need to consider locking it in.
When it comes to real estate and financing, there is an issue with timing. Simply put, the day you are approved for a mortgage is almost never the date that you close on a property. This presents a fundamental problem in relation to knowing exactly what your rate is going to be at the time of closing. Specifically, what if rates bump up half a point or more in the interim$%: It can really kill you on the monthly payments and may make a good deal become a bad one.
The good news is you can lock in the interest rate on a home loan once you are approved. Lenders will agree to lock in the rate for various time periods. This can be as short as 30 days and as long as 60. Getting your rate locked in makes sense on a couple of fronts. First, it gives you cost certainty while you go out and purchase a home. Second, it removes a potential headache from the purchase process during escrow, to wit, you suddenly find your self with a higher interest rate and reduced borrowing capacity.
So, should you buy the rate lock from the lender$%: In my opinion, it almost always makes sense. Why$%: Well, buying a lock in rate from a lender is usually very cheap. They handle it in different ways, but it usually equates to a couple hundred bucks. The specific calculation is often a measurement related to points. For instance, a lender may ask for the equivalent of one eight of a point on the loan to lock the rate If you are buying a house for $300,000, this equates to $375.
One scenario where you should almost always buy the lock in rate is a pre-approval situation. In a perfect world, you should always get pre-approved before you go house hunting. This eliminates any financing problems that might arise during escrow because you already have a lender committed to giving you financing. The downside of this approach is it can take you a few weeks or a month to find that perfect home. That is a long time for your interest rate to move up. In such a scenario, paying a couple of hundred bucks to lock it in makes sense.
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