Interest Rate Locks: What You Need to Know

Mortgage companies all follow the very same set of indices when setting mortgage rates. This is why interest rates from one mortgage lender to the next are very similar. One won’t find a rate at one lender for 3.0 percent and everyone else is at 4.0. Instead, differences in mortgage rates are typically very small, and usually, it’s the difference in cost in the form of discount points or origination fees. However, rate quotes aren’t any good when it’s time to lock unless you’ve met the lender’s lock-in guidelines.

Most lenders won’t allow an interest rate lock unless the applicant has a completed loan application on file. A completed loan application means the applicant has submitted all necessary documentation such as paycheck stubs and W2 forms, tax returns and a credit report, among other items. There are no universal guidelines that all lenders follow that set rules when you can and cannot lock. Lenders instead set their own standard.
Interest rate lock periods can vary from as short as 10 days on up. Lock periods can be for 60, 90 days or more. The longer the lock period, however, the more expensive the selected rate will be. A 10-day lock means the loan package is fully approved and all that’s needed is the rate lock. An important note, however: if the newly locked rate is different than the initial rate, the lender will then be required to run the loan through another automated approval at the new rate along with a brand new set of loan disclosures. This can add a few days to your closing, so keep in close contact with your loan officer.

A rate lock protects consumers should interest rates go up. Typically, this means the lock should be no longer than the settlement date. An interest rate lock is essentially a mortgage rate insurance policy; the borrower is protected. On the other hand, however, if rates go down, the consumers don’t get to “float down” the lock to get the new, lower rates. Lenders take locks just as seriously as consumers do. There are lenders that do allow for float-down locks, but again it’s up to the lender to establish its own rate lock policies. A common requirement is a minimum amount of rate change. For instance, if rates have gone down by 0.25 percent, a lender might allow a one-time adjustment to a locked rate. In such an instance, applicants can get a lower rate but not the lowest the lender offers.

If rates have fallen and the chosen lender does not honor a lower rate request for a locked loan, the consumer can think that just canceling the loan and going with another lender can be a solution. However, this means the entire loan file will need to be changed. The appraisal will need to be updated, for example. Other credit documents will need to be re-ordered. And until someone resubmits a loan application to a second lender, there is a critical time period where the loan file is not in a position to be locked in with the new lender. Switching mid-stream can be a dicey proposition.

Your loan officer can explain lock policies and even send you a disclosure form, which spells out when you can lock in and when you can’t and under what circumstances. Again, lenders can have different requirements so make sure you’re clear at the outset about the timing of rate locks.