Mortgages Explained – The Rate Lock

By Doug Katz – 06/17/2022

When you get apply for a loan the rate is a critical part.  Most people focus on the actual percentage rate but there are a lot of other components of securing the lock that go beyond that.  A big part is the lock or the agreement between you and the lender for a certain rate with a set amount of time to get the loan approved, clear it to close and fund the loan.

Prior to the actual lock, you are floating.  This simply means that the rate is moving up and down with the market like a boat floating on the water.  There is nothing inherently wrong with floating, you just need to know that there are no do overs if the market moves against you.  This is a time to balance the specifics of your transaction with the desire for certainty and a good rate.  This is a time where it is crucial to stay in close contact with your lender and to spend a bit of time to understand where the market may be headed.  This is not to make you an expert, but rather to ensure that your decisions are informed.

When you lock you will secure a particular rate for a specific time.  Most lenders have standard locks such as 15, 30, 45, 60, 90 and even 180 and greater.  Some lenders are beginning to allow customized lock periods such as a 37 day lock to better meet consumer needs.  Regardless of the lender and the flexibility on the options, you can expect to pay more for a longer lock.  Remember, the lender is committing to that rate and the further out the more risk that they are taking that rates can move to a better place for them and they are giving up that opportunity.  That opportunity cost is partially passed on to the consumer in the form of a greater cost for the rate.  You can see how you need to balance desired rate and time needed to optimize.

You are probably asking yourself, what happens if my transaction goes beyond the lock period.  The answer to this depends on how much time that you need to complete the transaction.  If it is a few days or even weeks, you can buy extensions on a per day basis.  Most lenders limit this, however, and a large extension is very costly, so this is a short-term solution.  Longer delays often require a relock meaning the lock expires and you relock the loan.  The catch here is that many of not all lenders will subject your new lock to worst case pricing meaning the worst rate between market and your old rate.  They do this to stop clients from strategically overrunning their locks to get a better rate.  The usual requirement to get back to straight market rate is to wait 30 days past the expiration for the relock.  This is why it is essential to plan well and execute even better during a transaction to include rapid and complete responses to requests for information or documentation.  I have seen a lot of clients blow locks due to procrastination.

You may also be asking what happens if rates drop.  Well, lenders are not ignorant to the fact that a client will apply and close elsewhere if rates drop enough to justify the effort.  As a result, they have float down or renegotiation policies that allow you to get a better rate in a favorable market.  Do not, however, expect to get all the way to market and there is usually a minimum market improvement required to execute this option.  An example of these requirement would be that rates need to improve by 0.375% and you would get 0.125% over the market.  So in that scenario, if you were at 5.5% and rate go to 5%, you would be able to get to 5.125%.  These are often one time deals, so again. make sure it is the right time if you pull the trigger.

One other important final thing that you need to understand is that your lock is securing a specific rate for a specific program for a designated amount of time.  If you change the program, i.e. 30-year fixed to 15-year fixed, it will lose the old lock and need to lock under the new program at market rate.  This is more important in volatile markets as it is not uncommon to need to switch programs to get a loan approved.  The same goes for changes in your situation such as if your credit score drops or if you bring less to close.  You lock period will not change, but the rate will based on your new financial and deal profile. This works both ways, so improvements in your situation could give you a better rate.

When in double, ask your lender.  They are there to provide informed advice as well as to represent the lender by providing you information on their policies regarding locks, extensions, repricing and other components of the lock.  This is especially important when shopping, even before you fully apply, as most marketing and advertising is based on a rate for a 30-day lock.  If you need a longer lock, you are starting your analysis and evaluation with the wrong pricing.  Even if not speaking with a lender, read the small print in any ad and you’ll see the assumptions.

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