When should you lock in interest rate?

Q:

If I’m refinancing now, should I lock in an interest rate? Some people say rates may go lower.

A:

And some people say they may go higher. When people ask me whether interest rates will go up or down, I always reply, “Yes.”

Deciding whether to lock in the rate you are offered today, or let the rate float with the hope it may go even lower, is a tough call. You need to analyze the question based on your own personal situation and risk tolerance.

When a borrower must lock in the interest rate on a mortgage varies somewhat from lender to lender. Generally speaking, you can set your rate at the time your application is submitted and accepted, or you can let the rate float for a period of time before locking it in.

By letting the rate float, you may have the opportunity to get an even lower rate than the one you’re being offered today. But there’s also the risk that the rate could go higher before you close. Interest rates change weekly or even more frequently.

Rates have been at historic lows for some time. It doesn’t seem as though there has been too much movement, and the consensus seems to be that they will remain low for the foreseeable future.

So how do you know whether to lock in or not? Well, one way to answer that question is to examine the math. 

Take the rate you are being offered today and figure out how much it will save you each month after you refinance.

Now figure out how much you will save if that rate were an eighth of a point lower and a quarter of a point lower.

Now figure out how much less you will save on today’s rate if that rate were an eighth of a point higher and a quarter of a point higher.  Log onto: www.bankrate.com, to find a calculator to help you do the math.

After you’ve got the numbers, ask yourself if the savings you’ll get from a possibly lower rate is really worth the cost and risk of a higher rate.

If you’ve already got a fairly good rate and the refinancing rate is only slightly better, it’s doubtful you would want to risk letting the rate float and possibly go up.

On the other hand, if you’re shaving a point or more off your current rate, a small move up might not be so devastating since you would still be saving a lot.

Ultimately, locking in or letting the rate float is a roll of the dice: You might save a little more. You might spend a little more.

My own feeling is that if today’s rates enticed you into the lender’s office in the first place, why not go with that rate? Why risk blowing it?