The Low-Down on Locking In Rates
A lock, lock-in, rate lock, or rate commitment is a lender's promise to hold a particular interest rate and number of points (if applicable) on a mortgage offer for a specific period of time.
The following information from the Federal Reserve Board and U.S. Office of Thrift Supervision gives guidance on locking in a rate:
Why do I need to lock in my offer? Your lender has quoted you a rate and terms based on the best offer he has at that particular moment in time. In reality, it may take days or weeks for your lender to prepare, document, and evaluate your loan application, and rates may change significantly by then. When you're checking out lenders, ask them what their locking procedures are even before you go in and apply. If they don't tell you in specific detail, go somewhere else.
When is it a good time to lock in a rate? Ah, that's where art meets science. No lender can tell you exactly what interest rates are going to do. It pays to study economic news in the newspaper and on television so you'll have a sense of what's going on in the credit markets and gather any signals from the Fed to see what they're thinking about inflation and other factors that lead to higher or lower consumer rates.
Is a lock-in the same as a loan commitment? No! A loan commitment is the lender's promise to make you a loan in a specific amount at some time in the future; you won't get a loan commitment until your application has been formally approved. If you're confident in the rate you've been offered, go for the lock-in as soon as possible.
Will I have to pay a fee for my lock-in? If you want an up-front lockin, you may have to, and you may not get that money back if your loan isn't approved. That's one more thing you need to ask prospective lenders before you decide where you're going to apply.
Should I get my lock-in in writing? You really should, particularly if you're paying for it. A lender should have a preprinted form that sets the exact terms of the lock-in agreement. You can go with an oral agreement, but it's pretty tough to prove in a dispute.
What's the timeframe on a lock? Locks of thirty to sixty days are common, but depending on market conditions and their settlement (closing) backlog, you might want to see if you can go longer or shorter. Lock-in timeframes should be part of your discussion with lenders before you apply.
What if my lock expires? Simple. You lose your promised rate and fees unless the rate marketplace and fee marketplace are the same, in which case you simply re-lock. Long lock-in timeframes make sense in volatile, busy markets because lender and broker workloads go up, and unless they staff up, they're probably struggling with a backlog.
Can I break a lock? You're obviously going to get resistance because you've already demanded the written lock you hold in your hand. But if it's a really significant drop — a quarter point or more — you can start by asking nicely. If there's no movement, you can always say you might cancel the loan. Your loan officer might grudgingly agree to go back and start the process again if you're a customer he wants to keep. But if your credit is lousy or so-so and you're just being a pain, be prepared for a refusal and not even a flinch if you take your business elsewhere. That's the risk you take.
What if my lock has expired due to bad service on my lender's part? If you believe there was serious malfeasance on your lender's part, go to Appendix D, check for your state's banking and financial services department, and see if there's a process for lodging a formal complaint.
Additionally, lenders typically offer different options in establishing the interest rate and points that you will be charged, such as these:
Locked-in interest rate, locked-in points: This is the best lock if rates are going up because your mortgage terms will stay at the interest rate and points that you've agreed upon even if market conditions change.
Locked-in interest rate, floating points: Under this option, the lender lets you lock in the interest rate while letting the points float until sometime before you close. Make sure you understand why your lender thinks points could significantly fluctuate up or down before you agree to do this. Remember, points have nothing to do with interest rates — they're service charges, pure and simple.
Floating interest rate, floating points: Under this option, the lender lets you lock in the interest rate and the points at some time after application but before settlement. If you think rates are headed down, you might want to throw the dice, but if rates are headed up, don't do it.
Unless you lock, your broker will wait until the last possible minute to secure your loan because he will have a built-in incentive to look for the loan that guarantees the most income. That may not be a bad idea — your broker may have excellent reasons for waiting. But press him often on which lender he wants to use and when he thinks he will commit. If he treats you like you're prying, then give him a piece of your mind. If you do lock, your broker owes you a piece of paper saying that's the case, and he should tell you where the loan is coming from.
Mortgage brokers are a very important part of today's delivery process, and they can be great teachers in the study of home ownership. But understand how they make their money, and make sure you can draw the proper advantage from working with them.
