You cannot close a mortgage
loan without locking in an interest rate. There are four components to a
rate lock:
- Loan program.
- Interest rate.
- Points.
- Length of the lock.
The longer the length of the lock, the
higher the points or the interest rate. 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 8% for 2 points 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.
The same lock might cost 2.25 points for a
30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and
do not want to pay the higher points, you may instead pay a higher rate.
After a lock expires, most lenders will let
you re-lock at the higher of the original rate/points or current
rate/points. In most cases you will not get a lower rate if rates drop.
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. |
