What Does Locking a Loan Mean?

What Does Locking a Loan Mean?

Mortgage rates change often, even several times a day. While you go through the underwriting process, rates can easily go up or down enough that your payment could change drastically one way or the other. This occurs until you lock in an interest rate.

Just what does that mean and how do you do it?

Understanding a Mortgage Rate Lock

A mortgage rate lock guarantees the interest rate you chose or locked. No matter what interest rates do – move up or down, your rate remains the same. The two things you should pay attention to when locking a rate are:

  • Interest rate
  • Lock period

You can’t lock a mortgage rate forever. You will choose your lock period, typically 30, 45, or 60 days. The longer you lock the rate, the more it may cost. Some rate locks are free – typically 30-day locks, but it depends on the lender. If a lender charges for the lock, you’ll see it as points. For example, locking the rate for 30 days may be free, but locking it for 60 days may cost you one-half of a point.

Timing Your Mortgage Rate Lock

Here’s the tricky part. You need to time your rate lock so that it extends at least to your closing date. Having a day or two afterward helps too, just in case there are delays in your closing. If the rate lock expires, lenders offer a few different options:

  • Extend the lock for free
  • Charge a fee to extend the lock
  • Offer the current rate/points based on the current market

If the current rates are at or near your locked rate, lenders are more likely to extend the lock. If rates rose significantly, though, you may be at the mercy of the market’s rates.

Can you Get a Lower Rate Once you Lock?

What happens if interest rates drop after you locked a rate? If they drop enough, you may be able to initiate a float-down and/or renegotiate the rate. Lenders don’t want to lose your business, so chances are they will work with you to get you the lower rate.

Typically, you should only exercise this option if you can save at least 0.25%. If rates drop enough, let your loan officer know you want to float the rate down. You’ll typically pay a fee, which is a percentage of your loan amount. Your loan must still close within the specified period, but now it will close at the lower interest rate, saving you money.

Every borrower must lock the interest rate before the closing. Whether you lock at the onset of the loan application and pre-approval or you wait until you are about to close is up to you. Talk with your loan officer about your options and know the market’s volatility. In a volatile market, locking your rate quickly is crucial. Remember that choosing your rate affects your payment, loan paperwork, and potential closing date, so choose your locked-in rate carefully.