You cannot close a mortgage loan without locking in
an interest rate. There are four components to a rate
1. Loan program.
2. Interest rate.
4. 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
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 price and the originally
locked price. 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.
What do you do if the rates drop
after you lock?
Most lenders will not budge unless the rates drop
substantially (3/8% or more). This is because it is
expensive for them to lock in interest rates. If lenders
let the borrowers improve their rate every time the
rates improved, they spend a lot of time relocking interest
rates, since rates fluctuate daily. Also they would
have to build this option into their rates and borrowers
would wind up paying a higher rate.
Most lenders will let you lock in an interest rate
only on a specific property. If you are shopping for
a house, some lenders offer a lock-and-shop program
that lets you lock in a rate before you find the house.
This program is very useful when rates are rising.
New-construction rate locks.
Most lenders offer long-term locks for new construction.
These locks do cost more and may require an up-front
deposit. For example, a lender might offer a 180-day
lock for 1 point over the cost of a 30-day lock, with
0.5 points being paid up-front, as a non-refundable
deposit. Most long-term new-construction locks do offer
a float-down––i.e. if rates drop prior to
closing, you get the better rate.