One thing that real estate investors should keep in mind when using investment loans is that mortgage rates are dynamic and unpredictable. They fluctuate frequently, sometimes even daily. This means that, when you first start your mortgage application, the mortgage rate may be different from the rate you will eventually get.
Every investor wants to get the lowest mortgage rate possible since it influences the monthly mortgage payments and, consequently, the cash flow and the return on investment on a rental property. Even a small difference in the mortgage rate can mean paying or not paying thousands of dollars in interest over the life of your loan. One of the best ways to ensure you get a good rate is through mortgage rate locking.
Since refinancing rental property or closing on a new property can take several weeks, you can lock in a low rate before the mortgage loan closes. But what exactly is mortgage rate locking and when should you do it?
What Does Locking in a Rate Mean?
Mortgage rate locking is when you sign an agreement with your lender to take out a mortgage at their current mortgage rate, provided that the loan is closed within a specified period of time, typically 30 to 60 days.
This means that even if the current mortgage rates go up before the loan closes, you’ll still get your mortgage at the agreed-upon rate. However, if the mortgage rates decline before the mortgage is closed, you’ll still be obligated to pay the higher rate you committed to. This means that you would eventually pay more than if you didn’t lock in the interest rate.
In return for the rate locking, lenders often charge a mortgage rate lock fee or a slightly higher interest rate. The fee will depend on the lender and other factors such as the lock period, duration of the loan, and the loan type (fixed-rate mortgage or adjustable-rate mortgage).
Some mortgage lenders will offer mortgage rate locking with a float-down provision. This allows you to take advantage of lower mortgage rates if they fall during the lock period. However, this provision comes with a cost, of course. While paying for a longer lock period can give you a cushion, it can be costlier. You have to carefully consider your options.
Advantages of Mortgage Rate Locking
Here are the main reasons to consider locking in a mortgage rate:
Protect yourself against an unexpected rise in mortgage rates
Mortgage rate locking ensures that an increase in the interest rate does not affect you. You will still pay your mortgage based on the lower rate you locked in.
Peace of Mind
Rate locking can also be a smart move if you want to eliminate the stress that comes with gambling on interest rates.
It can be tempting to wait and see where the real estate market is moving in the hope of getting a better rate. However, interest rates are hard to predict, even for experts. If you don’t lock your current rate, you will be at the mercy of market fluctuations. You’ll have to worry about possible changes in your monthly mortgage payments. You may also need to pay a higher down payment if the rate rises.
Mortgage rate locking alleviates risk and can give you peace of mind. There are usually many things to worry about when buying an investment property. With rate locking, you’ll have eliminated at least one concern.
Protect Your Buying Power
If you have a high debt-to-income ratio with your mortgage loan offer, you are likely to be financially tight. Therefore, an increase in the interest rate could affect your ability to qualify for the loan. Mortgage rate locking will help you preserve the current rate of your loan offer and maintain your loan approval.
When to Lock in a Mortgage Rate
Locking in a mortgage rate is often a wise decision. However, if you lock in a mortgage rate at the wrong time, like during a mortgage rate hike, you will end up paying more over the life of your loan. Therefore, you have to know when exactly to lock in a mortgage.
The best time to do it is when you will save the most money. If you feel like the current mortgage rates are good and fear that they may go up in the near future, it may be the right time to lock in the rate. This means that you should know the current mortgage trends.
However, it’s almost impossible to know the direction the investment property mortgage rates will go with certainty. To make the best decision for your situation, it’s advisable that you consult a mortgage professional before locking in a rate. It’s best to lock in the interest rate when it is expected to increase in the near future.
Having said that, it’s also important to know how long it will take you to find the right investment property and get your offer accepted. If rate locking is done too early, it may expire before you close. For you to extend the lock, you will have to pay extra fees.
The best time to lock in a rate is usually after you have signed the purchase agreement on the investment property. Mortgage rate locks usually take 30 to 60 days. This time is almost equal to the time it takes to close on a property. Therefore, by locking in a mortgage rate immediately after the offer is accepted, the duration of the mortgage lock will line up well with the closing date. You want to ensure that you close the loan within the mortgage rate lock period.
Should I Lock My Mortgage Rate Today?
You may be asking yourself, “Should I lock my mortgage rate today?” Well, as you know, mortgage rates are very volatile and rise more often than they fall. You should keep this in mind.
Interest rates in 2020 are nearing a record low as a result of the impact of the COVID-19 pandemic on the economy. In light of this trend, now can be the best time to take advantage of low rental property mortgage rates. If you are financially tight and can’t afford to gamble, you should strongly consider locking in your rate today. Be sure to shop around for the best rates before rate locking.
If you are buying an investment property, don’t forget to use Mashvisor’s real estate investment tools to find and analyze the best properties for sale in the US housing market. You want to find cash flow properties with good cash on cash return. Lenders are more likely to accept your mortgage application and offer better rates if the investment property has a high ROI potential. Good cash flow will also enable you to meet your monthly mortgage payments without digging into your pocket. You can also use Mashvisor’s calculator to see how your mortgage rate and loan terms will affect your return on investment before making a move.
The Bottom Line
If you are buying an investment property with a mortgage, you can take advantage of low mortgage rates by locking in an interest rate. This can protect you from rising mortgage rates that could increase your total mortgage cost and monthly payments. However, it does come with a cost. Therefore, before you decide to cement your rate, make sure it makes financial sense.