Refinancing Your Mortgage? When to Lock In

Timing the market and determining the best time to lock in your interest rate when refinancing your mortgage, well that's a conundrum, isn't it? As mortgage rates fluctuate just the way stock prices do, identifying the better-priced lender at any given point in time -- with the specific credit parameters -- can be quite a complicated process. Here's how to navigate current refinancing rates so you secure the best deal.

Set Expectations, Allow for Variances

If you have been thinking about refinancing your mortgage and missed the boat on lower mortgage rates during the past few months -- don't worry, you can still benefit. Rates are still low historically, even though the possibility of rates dropping below 4% on 30-year mortgages is unlikely. Unfortunately, the low rates we saw in March and April of 2013 will remain ... history.

Consider the following when refinancing your mortgage:

• Rather than searching by rate alone, search within a range. Typically competing lenders are between a quarter percent of each other.
• Expecting to pay no points? That might change depending on the rate you want. A small percentage of discount points could be applicable, and run anywhere from .125% to more than 1% of the loan amount.
• Locking in without an appraisal? Know this: Your interest rate/term is "subject to change" because an interest rate lock is based on a loan to value determination (how much the lender is willing to lend you vs. the value of the collateral, i.e. the house).
• Is your credit score under 740? Allow for greater potential interest rate variances by .375% in rate.
• Appraisals run the show. Depending on property value and loan amount, the terms and conditions can certainly change your rate and fees. And if you have less than 20% equity, that can cost you more in mortgage insurance.
• Allow for flexibility on closing costs by at least $1,000. A thousand dollars seems like a lot of money and it is. If you're quoted $2,700 for closing costs and you allow for a variance of $1,000, you're prepared if the appraisal costs change. This can happen if, for example, the scope of work required is different or if the market dictates percentages of discount points associated with your interest rate.

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When to Lock In the Refi Rate

The timing for when to lock in your refi rate depends on your goals, expectations and the property's occupancy type (that is, whether you're using it as a primary home, second home or investment property).

Things to consider for timing:

Locking upfront for 30 days upon appraisal order

Locking in your interest rate upfront when you order the appraisal is certainly something most lenders can accommodate. The major risk here is if your valuation does not come in at what you precisely say it is -- and if your loan to value changes, your interest rate could change.

If the loan to value is potentially anything 70% or more, it might make more sense to lock once the appraisal comes back. If it's projected that the appraisal will absolutely show significant equity to the tune of 40% or more, other than market conditions (and high credit score), there is little risk to locking in the interest rate upfront.

Locking upon appraisal

To lock instantly when the appraisal comes in allows for little or no chance of change to your rate, payment, terms or costs. 

Locking when the rate hits your target

By providing your mortgage company your interest rate lock preferences and any applicable pricing adjustments -- such as discount points with those rates -- you can allow your mortgage company to lock in your interest rate, with the expectation that they are watching the market proactively and are acting in your best interests. Allowing your loan officer to lock in your interest rate in lock step with market conditions provides an advantage over locking when the appraisal comes in, especially if by the time the appraisal comes in, the market has worsened (meaning rates rose). As the informed consumer, it's important to understand that your rate and pricing preferences could be available when you're not, so providing a range of lockable loan choices gives your mortgage company a sense of what pricing you expect.

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