Locking Your Mortgage Rate

In most cases, the terms you are quoted when you shop among lenders represent the terms available at the time of the quote. Therefore, you should not rely on the terms quoted to you when shopping for a loan unless a lender is willing to offer a lock-in.

Rate Lock-In is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender you may be able to lock in the interest rate and number of points when you file your application, during processing of the loan or when the loan is approved. A lock-in that is given when you apply for a loan may be useful because it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This protection could affect whether you can afford the mortgage. However, a locked-in rate could also prevent you from taking advantage of rate decreases.

It is important to recognize that a lock-in is not the same as a loan commitment. A loan commitment is the lender's promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender's commitment only after your application has been approved. This commitment usually will state the loan terms that have been approved, how long the commitment is valid, and the lenders conditions for making the loan.

Will You Be Charged for a Lock-In?
Lenders may charge a fee for locking in the rate of interest and number of points for your mortgage. Some lenders may charge you a fee upfront, and may not refund it if you withdraw your application, if your credit is denied, or if you do not close the loan. Others might charge the fee at closing. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction of a percentage point added to the rate you lock in.

Lenders may offer different options in establishing the interest rate and points that you will be charged, such as:

Locked-In Interest Rate-Locked-In Points
Under this option, the lender lets you lock in both the interest rate and points quoted to you. This option may be considered to be a true lock-in because your mortgage terms should not increase above the interest rate and points that you've agreed upon even if market conditions change.

Locked-In Interest Rate-Floating Points
The lender lets you lock in the interest rate, while permitting or requiring the points to rise and fall (float) with changes in market conditions.

Floating Interest Rate-Floating Points
The lender lets you lock in the interest rate and the points at some time after application but before closing. If you think that rates will remain level or even go down, you may want to wait on locking in a particular rate and points. If rates go up, you should expect to be charged the higher rate.

How Long Are Lock-Ins Valid?
Usually the lender will promise to hold a certain interest rate and number of points for a given number of days, and to get these terms you must close the loan within that time period. Lock-ins of 30 to 60 days are common. But some lenders may offer a lock-in for only a short period of time (for example, 7 days after your loan is approved) while some others might offer longer lock-ins (up to 120 days). Lenders that charge a lock-in fee may charge a higher fee for the longer lock-in period. Usually, the longer the period, the greater the fee.

The lock-in period should be long enough to allow for closing, and any other contingencies imposed by the lender. Before deciding on the length of the lock-in, you should find out the average time for processing loans. You'll also want to take into account any factors that might delay your settlement. These may include delays that you can anticipate in providing materials about your financial condition and, in case you are purchasing a new house, unanticipated construction delays, credit problems to be addressed, etc.

What Happens if the Lock-In Period Expires?
If you don't close within the lock-in period, you might lose the interest rate and the number of points you had locked in. This could happen if there are delays in processing whether they are caused by you, others involved in the settlement process, or the lender. For example, your loan approval could be delayed if the lender has to wait for any documents from you or from others such as employers, appraisers, termite inspectors, builders, and individuals selling the home. If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. If market conditions have caused interest rates to rise, most lenders will charge you more for your loan.

How Can You Speed the Approval of Your Loan?
Much of the information required by your lender can be brought with you when you apply for a loan. This may help to get your application moving more quickly through the process. So when you first meet with your lender, be sure to have the asked for items, and respond promptly to your lender's requests for information.