Sometimes the mortgage industry gets so used to a term they use many times a day, that they forget there are those who are not at all familiar with the term, its meaning or its significance.
Technically, a “lock-in” or “rate lock” is a commitment from a lender to loan money at a certain rate for a certain period of time.
Example: Today, Lenders can lock in a 30-year fixed rate jumbo loan for 4.125% for 30 days. This means that the mortgage broker locks this rate; the lender agrees that 4.125% will be the rate provided the loan closes within the 30-day (lock) period.
If rates go up, the borrower is protected. If rates go down, the borrower does not benefit from lower rates.
Note that the rate lock is not to be confused with loan approval. Mortgage Brokers can lock an interest rate at the time of loan
application and prior to loan approval. Locking in the rate does not mean that the loan is approved.
The ability to lock in a rate prior to formal loan approval is extremely valuable. Interest rates can and do change daily – sometimes even hourly. A borrower can depend on a rate being quoted only if it is possible to lock the quoted rate immediately.
Many loans found on the Internet can be locked only after the loan is formally approved and loan conditions are met. This limitation means that an advertised rate may or may not be available when the loan is approved – a process which could take a couple of weeks or more.
A loan can also be approved without locking the rate. For most purchase loans, buyers get preapproved for a loan prior to making an offer. This rate is not locked. It “floats.”
Buyers are generally advised to lock the rate as soon as they are officially under contract. This ensures that they can count on this rate and that they are protected against potential rate increases prior to close of escrow.
Some buyers opt not to lock at this point preferring to “float” for two reasons. First, they hope for lower rates. Second, they know that a 15-day lock gets a lower rate than a 30-day lock.
But – while it is true that at a given point in time a 15-day lock is cheaper than a 30-day lock, rates 15 days from now might increase so as to negate the difference. Or worse, rates may increase such that a 15-day lock (in 15 days) costs more than a 30-day lock costs today. And – the rate must be locked no later than 10 days before close in order to close on time, so a “floating” borrower could get caught in a high swell.
Buyers might ask this question. “Which makes me feel worse – to lock today and leave 1/8% on the table if rates drop or – don’t lock today and I have to pay 1/8% more if rates climb?” This soul-searching answer will help determine whether to lock – or float.
