So your FHA mortgage lender has made you an offer, and now they’re asking if you want to lock down the interest rate. What does this mean? How do you lock in a mortgage rate, and when is it wise to do so? Those are the questions we’ll address in today’s FHA lesson.
FHA Mortgage Rates Change Constantly
The first thing you need to understand is that FHA rates change on a daily basis. The more significant changes usually happen over a period of weeks. But they can also change slightly from one day to the next. This is an important concept to understand when shopping for an FHA loan. You never know if interest rates are going to rise or fall — you just know they’re going to change. This is why it’s so important to lock in a mortgage rate when you get a good one.
Common statement: “I’ll lock in eventually. I just want to shop around for a bit longer. I figure the FHA rates won’t change much within the next couple of months.”
This kind of logic could cost you a lot of money over the life of your loan. Sure, it’s important to shop around for the best rates. That’s why we recommend that you compare rates online before moving forward. But there comes a time when you need to lock the mortgage rate down, to prevent further fluctuations. There’s a fine line between smart shopping and procrastinating. Here’s an example of how the latter scenario can cost you money.
This table shows what would happen if I were taking out a $250,000 FHA loan (30-year fixed) at various interest rates. These calculations do not include property tax or insurance. To keep things simple, I’ve only included the principal and the interest.
|Rate||Monthly Payment||Total Interest Paid Over 30 Years|
This is the kind of scenario that can happen when interest rates are rising (as they are in March 2013) and when the borrower fails to lock down the mortgage rate while they’re low. You can see the difference that only 1% interest makes. If I locked in at the 5.7% level, I would pay about $1,451 per month. But if I procrastinated while the rates were rising, the size of my monthly payment would grow.
It doesn’t look like much of a difference at the monthly level — and that’s why I’ve included the total interest cost over 30 years. At the higher rate, I would pay around $58,000 more in interest over the full 30-year term of the FHA loan. This scenario shows the importance of mortgage rate lock, and the costs associated with it.
How to Lock Down a Rate
So you’re convinced it’s a good idea to lock down a mortgage rate while they are low (especially if the general trend shows that rates are rising). What next? How and when should you lock in your FHA interest rate? The “how” part is fairly simple. You would sign a document that serves as a commitment between you and the lender. It’s a paper shuffle for the most part.
But the “when” part requires more thought. Here is some expert insight into this question:
So when you feel you’re being offered a fair rate based on your qualifications, it’s a good idea to take it. This gives you a guarantee that lasts through the closing process, or through the rate commitment expiration date (whichever comes first). If you put it off, you could face a higher level of interest — and the higher mortgage cost that goes along with that.
The Bottom Line
When it comes to FHA mortgage rates, nobody can predict the future. You never know what the rates will be two days, two weeks, or two months from now. But you can certainly keep track of the market to have a general idea which way they’re moving.
The whole discussion of mortgage rate lock can be summed up in three words: risk versus reward. If you put off the lock-in for a few days or weeks, you run the risk of getting a higher rate. But there’s also the potential that rates will drop — that’s the reward side of the coin.
If you’re comfortable with the current level, and you feel like you’re getting a good deal, you should probably lock down your FHA rate and get on with life. If there are strong indications that rates are going to fall soon, then you might want to wait a while. Risk versus reward.
I hope you’ve enjoyed this lesson on FHA rate lock, and I wish you well in your home-buying process. If you’d like to learn more about this subject, use the search tool provided at the top of this page. It gives you access to a large library of mortgage-related tutorials and resources!