Frequently Asked Questions
Q: What is a rate lock?
You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:
- Loan program.
- Interest rate.
- Discount Points.
- Length of the lock.
The longer the length of the rate lock, the higher the points or the interest rate charged. 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 6.5% 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.
For a 30 day lock might you might have an interest rate of 6.75% or 6.5% plus .375 points. 45 or 60 day lock will increase the rate and points or both.
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 renegotiate locked rates unless rates drop substantially (.500% or more). The reason for this is simple. It is very expensive for investors to lock in interest rates and the market volatility on a daily basis requires that prior to closing customers decide on a rate and move forward to finalize the loan. If interest rates drop substantially from the time you lock until the time you plan to close your loan we at Global Lending Group have arrangements with our investors to renegotiate the rate on your behalf. These changes must be substantial and warranted by market conditions.
New-construction rate locks.
Most lenders offer long-term locks for new construction. These locks do cost more and in many cases 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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