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to FAQ's > |
| What
is a rate lock? |
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You
cannot close a mortgage loan without locking in an
interest rate. There are four components
to a rate lock: |
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1. |
Loan program. |
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2. |
Interest rate. |
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3. |
Points. |
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4. |
Length
of the lock. |
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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 prevailing market rates/points,
or the originally locked rates/points. In most cases
you will not get a lower rate if rates drop. In some
cases, prior to the rate lock expiration date, the
lender may allow you to negotiate a rate lock extension
at the original rate/points. An additional fee may
be charged for this extension.
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.For
example: the float-down rate may be 0.125% to 0.25%
higher than the prevailing current market rate. |
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| What
happens if rates drop after you lock? |
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| Most
lenders will not budge unless rates drop substantially
(3/8% or more). This is because it is expensive for
them to lock in interest rates. If lenders let borrowers
improve their rate every time rates improved, they'd
spend a lot of time relocking interest rates, since
rates fluctuate daily. Also, they would have to factor
this option into their rates, and borrowers would
wind up paying a higher rate. If rates drop, one option
is to go to a different lender. In this case, you
would be starting the loan process from the beginning.
If you have your loan with a mortgage broker, however,
they'll probably be able to move your loan package
(including application) to a new lender offering lower
rates. Before applying with a different lender, inform
your original lender that you are aware that rates
have dropped. You may be pleasantly surprised to find
that they will work with you rather than lose you
to a competitor. |
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| Lock-and-shop
programs? |
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| Most
lenders will let you lock in an interest rate only
on a specific property, which means, if you are shopping
for a home, you cannot lock in an interest rate until
after you sign a purchase contract for a specific
property. If you are shopping for a home, some lenders
offer a lock-and-shop program that lets you lock in
a rate before you find the home. This program is very
useful when rates are rising. However, lock-and-shop
rates are usually higher than the prevailing market
rate. Also, the lender may charge a non-refundable
fee or deposit towards closing costs. |
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| New-construction
rate locks? |
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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.
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