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.
