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You cannot close
a mortgage loan without locking in an interest rate. There are four
components to a rate lock:
1.
Loan program.
2.
Interest rate.
3.
Points.
4.
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
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
What
happens if rates drop after you lock?
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.
Lock-and-shop programs.
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.
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.
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