You cannot close a
mortgage loan without locking in an interest rate.
There are four components to a rate lock:
- Loan program.
- Interest rate.
- Points.
- Length of the
lock.
The longer the length
of the lock, the higher the points or the interest
rate. This is because the longer the lock, the
greater the risk for the lender offering that lock.
Let's say you lock in
a 30-year fixed loan at 8% for 2 points for 15 days
on March 2. This lock will expire on March 17 (if
March 17 is a holiday then the lock is typically
extended to the first working day after the 17th).
The lender must disburse funds by March 17th,
otherwise your rate lock expires, and your original
rate-lock commitment is invalid.
The same lock might
cost 2.25 points for a 30-day lock or 2.5 points for
a 60-day lock. If you need a longer lock and do not
want to pay the higher points, you may instead pay a
higher rate.
After a lock expires,
most lenders will let you re-lock at the higher of
the original price and the originally locked price.
In most cases you will not get a lower rate if rates
drop.
Lenders can lose
money if your lock expires. This is because they are
taking a risk by letting you lock in advance. If
rates move higher, they are forced to give you the
original rate at which you locked. Lenders often
protect themselves against rate fluctuations by
hedging.
Some lenders do offer
free float-downs––i.e. you may lock the rate
initially and if the rates drop while your loan is
in process, you will get the better rate. However,
there is no free lunch––the free float-down is
costly for the lender and you pay for this option
indirectly, because the lender has to build the
price of this option into the rate.
What do you do if
the rates drop after you lock?
Most lenders will not
budge unless the rates drop substantially (3/8% or
more). This is because it is expensive for them to
lock in interest rates. If lenders let the borrowers
improve their rate every time the rates improved,
they spend a lot of time relocking interest rates,
since rates fluctuate daily. Also they would have to
build this option into their rates and borrowers
would wind up paying a higher rate.
Lock-and-shop
programs.
Most lenders will let
you lock in an interest rate only on a specific
property. If you are shopping for a house, some
lenders offer a lock-and-shop program that lets you
lock in a rate before you find the house. This
program is very useful when rates are rising.
New-construction
rate locks.
Most lenders offer
long-term locks for new construction. These locks do
cost more and may require an up-front deposit. For
example, a lender might offer a 180-day lock for 1
point over the cost of a 30-day lock, with 0.5
points being paid up-front, as a non-refundable
deposit. Most long-term new-construction locks do
offer a float-down––i.e. if rates drop prior to
closing, you get the better rate.
