When shopping between lenders for mortgage loans, the quote regarding the interest rate and points only represent what terms are available at the time. This may not accurately represent what is available at closing. To guarantee that the rate and points you were quoted is the same at closing whether it be weeks or months away, lock-in the interest rate through what is known as a rate lock or rate commitment.
The majority of lenders will agree to commit to the rate quoted in writing for an allotted period of time while the loan application is processed. When locking-in an interest rate, deal with a lender who provides this agreement in writing. Read the agreement fully and carefully and watch out for lock-in agreements that will become invalid due to events out of your control.
Rate Lock Options
Locking-in the interest rate AND the points: When both the rate and points are locked you will have a comprehensive understanding of what the loan will cost you. Because neither the rate nor the points will increase you will be protected in the event the market conditions rise.
Rate commitment for interest rates AND floating points: The interest rates are will not change during the lock-in period but the points can increase or decreased depending on whether the market rises or falls. The lender may allow you to lock-in points at a certain time between the submission of your loan application and closing.
Floating interest rates AND floating points: Floating rates and points will allow you to lock-in the interest rates at some point in time between loan submission and closing. If you have a tight budget this option may be too risky in the even that the market conditions rise.
Why would I opt to float the rate? Buyers who anticipate interest rates dropping between loan application submission and closing may choose to float the rate. This can be risky, however, because if the rates rise the mortgage payment will surely increase.
Does it Cost Anything to Lock-in the Rate?
Sometimes lenders will charge a fee for locking-in rate and points. The cost will vary depending on the length of the lock-in period. The fee is rarely refundable if you withdraw your application, your credit is denied, or you do not close on the loan. The fee may be charged up front or as a component of the closing costs. The amount and when it is due will vary depending on the lender.
Rate Lock Duration
Typically the lock-in will last for 30-60 days. Some lenders only have short lock-in periods while others offer longer rate lock periods for a higher fee. The duration of the rate lock should be long enough to allow for the loan approval process to be completed and take into account contingencies that may delay closing.
Rate Lock Expiration
Unexpected circumstances, caused by you or out of your control, can delay the loan from closing before the lock-in period ends. Even if the delay is due to the lender’s mistake, you will lose the ensured interest rate and points and risk being given rates and points based on the current market conditions. Ask your lender prior to locking-in the rates what will happen if the loan does not close before the lock-in period expires.