Depending upon the lender, you
may be able to lock in the interest rate and points upon
submitting your application, during application processing,
upon loan approval, or later.
A rate lock protects you
against rate increases while your application is being
processed. However, a locked-in rate could cost you money
in the event rates drop and you want a lower rate You
will need to lock the rate on your mortgage some time
prior to closing. There are five components
to a rate lock:
You must identify
each of the above mentioned items in a rate lock. A rate lock
might look something like this: 30 year fixed, $150,000
loan amount, 7.5 percent, one point, 30 day lock period.
The document describing the lock will contain the date the
lock was made and usually the lock expiration date. The lender
must disburse funds prior to the expiration of the lock period,
otherwise, the rate lock is invalid.
A loan with a below-market interest rate is less attractive to a potential purchaser
of the loan. The longer the lock period, the greater the risk that interest rates
will increase before the loan closes. To offset this increased risk, the lender
charges increasingly higher points and/or interest for longer lock periods.
If
rates increase during the lock period and your lock expires,
most lenders will let you re-lock at the new, higher
rate or points. If
rates decrease during the lock period and your lock expires,
lenders usually will charge a penalty to take advantage
of the new, lower rates.
For a fee, some lenders
allow a "float-down" option which allows you
to take advantage of decreasing interest rates. Once a
lock expires, be prepared to renegotiate the rate and points.
What
do you do if the rates drop after you lock?
Unless
you have the option to float-down, most lenders will
not budge unless rates drop substantially (3/8 percent or
more). Lenders incur fees when they lock loans. If
lenders were to allow borrowers to cancel a lock every
time rates improved, they'd spend too much time re-locking
rates, and the increased costs would have to be passed
to borrowers.
Lock
and Shop Programs
Most
lenders will let you lock an interest rate only in
connection with a specific property. Some lenders offer
lock-and-shop programs which let you lock a rate before
you find your home. Both
programs can be valuable when rates are rising.
New
Construction Rate Locks
Most lenders offer long-term
locks for new construction. Since these locks tend to
be relatively long, they can be expensive. An up-front
deposit is sometimes required also. Most long-term new
construction locks offer a float-down
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LendFast.com - What is a rate lock?
