To lock or not is a question that plagues many consumers when they decide to refinance a loan. The rate might be yours for years, so it's advised that you make an informed and savvy decision.

Applying for a mortgage refinance reminds some borrowers of bidding at an auction. You decide how much you're willing to pay, and then commit before the gavel bangs to seal the deal. As with most market-based financial transactions, timing is everything.

Timing your mortgage refinance

But it's never easy to time rates that are subject to myriad future forces; so guessing the direction of rates poses a serious challenge. Just as it's impossible to know when the ideal time is to buy or sell stocks, your timing of when to lock the interest rate on your refinance is never going to be perfect. But you can improve your chances of success by taking into consideration your unique circumstances and current monetary trends.

Take these three steps:

  • First, take a good look at your financial situation.
  • Next, observe the current trend in interest rates.
  • Finally, lock in a rate based on your own comfort level.

Waiting to lock can be stressful, because your refinance mortgage is kept in limbo. Locking too soon-for a relatively long period of 60 days or so-can mean paying a higher rate. Both extremes can cause you to fret and worry. Rather than go through the angst, it makes more sense to strike a compromise for your own peace of mind.

Reasons to lock

The primary consideration for borrowers who are thinking about locking a rate is the date of their closing. If you're planning to close on your mortgage refinance within 30 days, it's fairly safe to lock in your rate for 45 days. That way, you have some wiggle room in case the closing is delayed for some unforeseen reason. Maybe the lender hasn't received the appraisal report, maybe you need to order a property survey, or perhaps you have an unexpected emergency that forces you to go out of town on short notice.

Hedging your mortgage refinance bets

One way to hedge your bets is to lock in various rates for different lengths of time with a number of different lenders. The drawback here is that the non-refundable application fees may very well cost more than you can potentially save by taking this shotgun approach to locking in your rate.

In the long run, especially if you plan to keep your refinance loan for many years, a difference of a fraction of a percentage point can add up to a substantial amount of money. To calculate your savings, have your lender show you the difference in monthly payments based on various rates; then, multiply the difference between those payments by the number of months you expect to pay on the loan.

Ultimately, you can't time the market. But you can intelligently predict the outcome of refinancing your loan, and make financial plans accordingly.

Published on January 30, 2008