One of the most confusing aspects of mortgages is the rate lock. In its simplest form, a rate lock essentially means the lender is setting money aside to lend to you at a specific interest rate. Basically, a rate lock is a guarantee of the interest rate assuming you are approved for the mortgage. It is very important that consumers understand how rate locks work.
Mortgage Rates Change Everyday:
Mortgage rates are a function of the pricing of mortgage backed securities. As a result, the pricing lenders offer change EVERY SINGLE DAY. If you are shopping mortgage lenders, you cannot call one lender on Monday and another on Tuesday to get an apples to apples comparison. You have to call every lender on the same day. This is especially important now because the market is so volatile that mortgage rates actually may change multiple times PER DAY, not just daily. In order to have an accurate rate quote, the quote must be a quote that can actually be locked that day.
Time Frame:
The vast majority of lenders will only lock interest rates in 15 day increments up to 60 days. Most home purchase take about 45 days to close from the date of contract to closing. See the connection? Rates are locked for 15, 30, 45, and 60 days in most cases. The longer you need to lock the rate, the more expensive the mortgage will be. There can be up to a .375% difference in rate between a 15 day lock and a 60 day lock. It cost more to lock a loan for longer time period because it increases the chances that the lender will not actually close on the transaction. Lenders track how many loans they have locked and if the loan will actually be delivered in order to hedge their capital. The cost of that hedging goes up the longer the locks have to be in place.
Property Address:
Lenders will not lock interest rates without a physical property address. In other words, no lender will guarantee an interest rate during the pre-approval stage if you are not under contract to buy a home. There are a few banks who have “Lock & Shop” programs, but in most cases, the rates are not competitive to the current market.
Floatdowns:
Consumers often want to know what happens if they lock and interest rates go down. Most lenders have in place “floatdown” policies. This means the loan officer may be able to negotiate a better rate. However, floatdowns are not free in most cases. Consumers need to understand that a rate lock is a rate lock. In other words, you can’t have your cake and eat it too. The bank is not going to call you and raise the rate if the market worsen’s after you lock, so they aren’t necessarily going to lower your rate either if the market improves. Often times many unscrupulous loan officers will use this as a sales tactic by insisting they will lower rates after a rate lock. It is possible, but it isn’t as easy as it sounds and is dishonest to say it will automatically be done.
A Rate Quote is NOT a Rate Lock:
A rate lock is when the broker selects the wholesale mortgage provider and takes the formal step of actually “locking” with that lender at a set interest rate within the constraints above. Consumers should ALWAYS ask for some type of written confirmation that the rate is locked. Simply calling around getting rate quotes is not the same thing as when a lender formally guarantees the rate.
If you are transaction does not fall within the guidelines above it is POINTLESS to get rate quotes. In fact, you should run, not walk, from any lender who willingly gives out rate quotes without you actually having identified a property and being within 60 days of needing to close. The quote is worthless and most professionals won’t waste their time lying to you.
[...] Rate Locks Explained [...]