There are several aspects to the decisions around locking an interest rate. The following information is a bit lengthy but it explains General Information, The When to Lock Conundrum and Can a Locked Rate be Renegotiated.
General Information: When interest rates trend upward, borrowers are more concerned about protecting themselves by “locking in” their loan rate. A rate lock is a lender’s commitment to loan money at a pre-determined interest rate and fee and to hold such commitment for a pre-determined time period. It is also a commitment from the borrower to complete the loan with the agreed upon terms.
The primary factor that determines lock pricing is the length of time for the lock period. A lender, for instance, might “guarantee” a borrower a 6.50% interest rate at a cost of 1 point origination/discount fee as long as the loan transaction is completed within 45 days. If the lock period were for a shorter period of time (i.e. 15 days), perhaps the rate or the fee would adjust slightly downward. Should the loan transaction not be completed within the lock period, it will expire. The typical rule upon expiration is that the borrower would be required to accept (within 30 days following the lock expiration) either the lock rate or current market rate, whichever is higher. This is to discourage borrowers from merely letting a lock commitment expire just prior to closing escrow with the expectation of acquiring a lower rate.
Rate lock periods vary . . . usually 15, 30, 45 or 60 days. When the lender is expected to “hold” the rate for more than the 15 day period, the origination/discount fee usually increases slightly depending upon the length of the lock, market conditions and the consequent “risk” to be absorbed by the lender. Any additional cost can also depend upon the type of loan acquired (i.e.; fixed, adjustable, conventional, FHA, USDA or VA).
Most loans can be locked at the time of application or at any time during the loan processing period. Some “jumbo” loans (i.e.; those loan amounts in excess of $766,550) can be locked only for a maximum of 45 days, or, in some instances, may be locked only after lender/underwriter approval.
Potential home buyers who regularly compare rates by calling lenders for their “daily quote” can be confused when they are given varied rates because each lender may be quoting for a different lock-in period. Be certain that one is obtaining true comparison quotes when “shopping” rates. It is advised that borrowers schedule a free pre-qualification interview rather than merely shop rates. An interview will let the lender suggest the appropriate loan product to meet the borrower’s particular financial need(s). At the same time, the lender can provide some guidance as to the best time frame for locking your loan.
The alternative to locking in the rate is to allow the loan to “float the market” during the loan processing period. The borrower can elect at any time during this float period to lock their loan or the loan can continue to float toward the final stages of the loan process. The question, then, is should one lock or float? This is usually the borrower’s decision alone and can seem like a bit of a gamble. While no one can know for sure what interest rates are likely to do over any particular period of time, consultation with the Lender and Realtor(s) is always available to assist in trying to acquire the “best” rate possible.
One final thought . . . after deciding to lock your loan, don’t second guess your decision. Remember, you selected the rate, you can’t change it, stop worrying about it. An eighth of a percent is likely to make little difference in your payment anyway, so don’t make yourself crazy over having missed that very lowest rate.
The Locking the Rate conundrum: As home buyers reenter the market accompanied by periodic interest rate reductions, deciding when to lock-in a rate will become increasingly difficult. While the desire is to acquire the lowest rate possible, interest rate volatility makes it impossible to know what will occur day to day.
Let’s use the following scenario to demonstrate a likely situation going forward. Upon signing a purchase agreement with a 45-day estimated close of escrow date, the interest rate is at 6.5%. The buyer chooses to protect oneself from any rate increase and locks the rate. Twenty days later the rate declines to 6.25% and ten days later it declines again to 6.125%. A borrower who originally accepted the higher rate understandably questions whether the lower rate is somehow available but is reminded that a reduction (sometimes called a “float down”) is not typically possible. The homebuyer is understandably disappointed and maybe just a wee bit miffed.
Although understanding this conundrum does not necessarily make the decision making any easier here is the reality of the situation. When a lender “locks” the rate, the borrower is guaranteed that specific rate (noted above in the general information section) as long as the loan closes within the specified lock period. The borrower is protected against rate increases but loses the ability to take advantage of any subsequent rate reductions. When guaranteeing a rate, the lender agrees (and commits funds) to deliver the particular loan to the market at that specific rate. Any adjustment, especially to a lower rate, can be quite costly to the lender. Hence, the reluctance to revisit a locked loan.
Can a Locked-In rate be Renegotiated: The section above noted the dilemma of watching rates continue to adjust downward after having locked the rate. Disappointment is expected accompanied by the inevitable question of “can anything be done”? Are there alternatives and/or solutions?
None of the alternatives are attractive or even realistic and the list is small.
- Floatdown: Although everyone would prefer a situation wherein the lock-in rate automatically reduces as the overall rates decline, this idea of such a “float down” is generally not available.
- Let the Lock Period Expire: As rates decline and the original lock-in date nears, why not merely let the original lock expire and re-lock at the lower rate? Lenders would not escape their penalty fee in an immediate re-lock situation. Thus, the rule is that one cannot lock at a lower rate until a 30-day period has elapsed from the original lock’s expiration date. The risk of waiting plus the additional time interrupting the anticipated closing date usually negate this option.
- Switch to Another Lender: Again, time becomes a major factor plus the typical expense of obtaining a new appraisal (and the hefty fee required) usually makes this option unappealing.
- Can Your Local Mortgage Provider Help: Although unlikely, your local mortgage broker can TRY to negotiate what is called a “blended rate” wherein the lender agrees to a rate between the original higher rate and the current lower rate. Any chance of this occurring usually requires a substantial difference between original and current rates. We must emphasize that while your local lender will make every effort to provide some relief, there is no guarantee that this option will work, especially if the rate differential is three-eighths of a percent or less.
Bottom Line, When to Lock-In an Interest Rate: Every decision is a risk. As a borrower, does one risk an upward turn in rates or risk disappointment if rates decline during the loan process? A very difficult decision!