Is Your Loan Rate Automatically Locked?
Most mortgage lenders will automatically lock your loan for an initial period. If they do, some standard locking periods are 30, 45, or 60 days. If you’re unsure, check your initial loan estimate—it should clearly state whether your rate is locked and for how long. If it’s not, then you can discuss your loan lock options with your lender and decide whether you want to lock yours.
What Are the Risks if the Loan Is Not Locked?
Let’s say you decide to wait. You’ve narrowed down where you will get a mortgage and looked at all your loan choices. Maybe you’ve even decided on the loan product you want. But the housing market is falling. The Federal Reserve has cut interest rates twice, and you expect them to drop further. So you decide not to lock. This is no different from gambling. Rates may go down, and your gamble could pay off. In that case, you would have been a little worse off if you had locked your loan. But if rates go up, you have no protection. You will pay a higher rate if you remain with that lender—a lock would have prevented the increase.
What Are the Main Elements to Loan Locks?
When deciding to lock a loan, there are three points to consider:
Interest ratePointsLength of the lock period
If you’re still shopping around and need more time but want to keep a loan locked, you’ll pay extra for an extended loan lock. The lender might increase the interest rate or use points to reflect the loan lock fee. That’s because the lender is taking on more risk—the risk that rates could go up while the transaction is processed. This can cause the lender to lose money if they fund a loan at a lower-than-market interest rate.
Are You Stuck With the Loan if You Lock?
Locking in the rate does not mean you’re wedded to that lender. You’re free to go elsewhere for a loan if the rates have gone down when the transaction is ready to close. Many borrowers think they are stuck with the loan they have locked in. However, the truth is that if rates go down, and you threaten to pull the loan, the lender will probably renegotiate the interest rate, because it wants to keep its customers.
How Are Loan Lock Rates Figured?
A 30-day rate lock might cost you half a point, whereas a 60-day rate lock might cost one full point. Points are a percentage of the loan amount. So, half a point on a $200,000 loan is $1,000. You won’t pay these fees upfront; you’ll pay them at closing. So if the loan never closes because you’ve changed your mind or gone elsewhere, you won’t pay a fee.
Is There a Downside to a Loan Lock?
There is rarely a reason not to lock a loan. Interest rates change daily, sometimes even hourly. To protect yourself against the marketplace’s volatility, it’s a good idea to lock your rate once you are satisfied with it. Just remember that if the rate was acceptable when it was locked three weeks ago, a drop of an eighth of a point or so isn’t the end of the world. You don’t need to try to squeak out every dime to get a good deal. The important thing is that you end up with a home you’re happy with at a price you can afford.
