You cannot close a mortgage loan without locking
in an interest rate. There are four components to a rate lock:
- Loan program.
- Interest rate.
- 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 committment is invalid.
The same lock might cost 2.25 points for a 30-day lock, 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 lunchthe 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
Most lenders will not budge unless the rates drop substanially (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 everytime 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