When should you lock in a mortgage?

By SmartMoney

Timing the market to land a mortgage with the lowest rate possible is like trying to hit a moving target. It's not impossible, but it takes patience and a keen eye, particularly in today's volatile market.

Mortgage rates can fluctuate over a few days or several weeks. The leading indicators that influence rates vary depending on the type of loan for which you're approved and whether it's a fixed-rate or adjustable rate mortgage, or ARM.

Before the downturn, some mortgage rates could be tracked and predicted relatively easily because a few leading indicators were more closely bound to rates, says Keith Gumbinger, a vice president for mortgage-data tracking firm HSH. For example, fixed-rate mortgages moved in closer step with 10-year Treasury note yields than they do now. Now those rates are also influenced significantly by other factors, including the unemployment rate, consumer spending and fear of inflation, he says.

According to the most recent data from Bankrate.com, the weekly average rate for a 30-year conforming mortgage was 5.38% as of Sept. 16, compared with 5.52% four weeks earlier. The average rate on a 15-year mortgage for the week of Sept. 16 was 4.72%, and the average rate on a 5/1 ARM (the most common ARM, whose interest is fixed for the first five years and then becomes variable) was 4.89%.

These rates approach the near-historic lows they touched earlier this year, but they may not stay that way for long.

"Trying to time the bottom of the marketplace is like trying to time the stock market," Gumbinger says. "Even insiders don't know when interest rates may change quickly."

Borrowers can lock in a mortgage rate any time from a few weeks before closing up to the end of the process. Locking in is particularly useful if the borrower believes rates will soon increase. But navigating the mortgage labyrinth can be tricky and costly.

Here's what borrowers should know about locking in mortgage rates.

When is the right time to lock in?

In most cases, buyers must first find the home they want to buy and sign a purchase agreement on it. That often requires a deposit of around 5% of the home's price, says Gibran Nicholas, the chairman of CMPS Institute, an Ann Arbor, Mich., organization that trains and certifies mortgage lenders and brokers.

Once a lender has shown the potential homebuyers the mortgage for which they have qualified, they can then ask to lock in the rate through the closing process, which usually lasts around 30 to 45 days.

How much does it cost to lock in?

Lenders who allow borrowers to lock in a rate for around 30 days often don't charge a fee, says Chip Cummings, the president of Northwind Financial, a mortgage and real-estate consulting company in Grand Rapids, Mich.

Borrowers who anticipate that closing will take longer can request to lock in a rate typically for up to 60 days, which most lenders will let them do for free or for a fee of up to 0.5% of the total loan, Nicholas says. Some lenders permit lock-ins for up to 90 or 120 days for some borrowers, including those who haven't found the home they plan to purchase, but those homebuyers have to pay a fee of 0.5% to 2% of the total loan amount.

Buyers who have about a week left until their lock-in expires should contact their mortgage company to confirm that their closing will wrap up within the allotted time and, if not, to inquire about extending their lock, Cummings says.

What are the pros of locking in?

Locking in a mortgage rate eliminates uncertainty for the buyer, says Buz Livingston, a fee-only certified financial planner in Santa Rosa Beach, Fla. You'll know whether you can afford your mortgage and in most cases what your monthly mortgage payments will be.

When shoppers find a mortgage at a price level they can afford, they should lock it in, Gumbinger says. Otherwise, they run the risk of ending up with a higher rate, which could result in a smaller mortgage that may not cover the cost of the home.

Continued: What are the cons of locking in?

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