Home Mortgage Essentials: Locking in Your Interest Rates

Locking in Your Interest Rate: An Overview

Locking in your interest rate is a way for borrowers and lenders to make a commitment to a certain percentage on a home loan. Timing is essential to doing this right. In some regards, it’s a bet on both sides—the borrower is betting the interest rates will go up after a certain point, and the lender is betting they will go down at a certain point. Both will ante up their opinions and try to squeeze the most out of the market conditions and manipulate lock-in periods.

When It's Preferable to the Borrower

For the borrower, it is best to lock in a rate if it looks like interest rates will increase. This can be difficult, especially since buyers often have other responsibilities than watching the minute daily undulations of “going” interest rates or listening to a streams of newscasts that can affect them.

When It's Preferable to the Lender

For the lender, it would be best to lock in rates if they are in danger of going down. Lenders have an advantage over the buyers in most cases, in that they work in the field, so part of their job is keeping track of news that can affect the rates they can charge. So while you are in a production meeting, assembling a car, or caring for a patient, they are tuned in to the news that can affect their income—and your payments.

You Have to Lock Your Rate in at Some Point

Eventually you will have to lock your rate anyway—logically, loan agreements can’t be finalized without a known interest rate and payments calculated. The day after you lock in, you may find interest rates have dropped. That’s not so bad—remember there is probably a poor chap out there who resisted locking in until the last minute, and found that he will have to pay more for his waiting.

Watch the News and Pay Attention

It makes sense to lock in your rate when you think the time is best, but it pays to watch the news surrounding this subject. Economic and political news, and disasters, can effect interest rates. Economic news can indicate the progression or regression of conditions such as inflation and recessions; political trends could indicate policy making that could affect the industry; disasters like 911 and Hurricane Katrina can also affect the way people view money, and can generate fears and alter buyers’ behavior in general.

Conclusion and Summary

These factors never stay stable, and interest rates fluctuate as a result. Keep your fingers on the pulse of your nation and the world and your will be better able to predict when to move on locking in your interest rate.