Interest Rate Locks

An interest rate lock-in is simply a lender’s promise to hold a certain rate for a specified period of time, while the loan application is being processed.  The length of a rate lock varies from 15 to 75 days, though the norms that appear on most wholesale rate sheets are 15, 30, 45, & 60-day locks.  There are some lenders who have rate lock terms like 20, 35 and 50-day locks but they’re in the minority.

Contrary to what some people believe, it costs a broker nothing to lock a rate.  (This is not to suggest that one can lock with impunity—if done frequently the lender will disapprove the broker).  The fee for a rate lock is assessed only if and when the deal closes.  Then, the fee is either charged to the borrower or borne by the broker if he or she is receiving a rebate. 

The longer the term of the interest rate lock, the higher the cost. Hence, a 15-day lock will be the least expensive and a 75-day lock, the most.  The actual cost between terms amounts to a percentage of a point, usually an eighth of a percent.  When the mortgage markets are stable the variance between say a 15-day lock and a 30-day lock may be as little as a sixteenth and when they’re in turmoil the difference may be as great as three-eighths because financial markets abhor uncertainty.

Generally, lenders are very good about honoring rate locks on their programs, but there are exceptions, as evidenced by what happened last month.  In instances where lenders have elected to discontinue loan programs with files already in process, they simply deny loan approvals.

In cases where the approval has been granted but the rate hasn’t been locked, they will usually announce a deadline by which locks will be honored and/or at a revised price.  If the loan has been approved and locked, but the lender doesn’t have investors to buy the loans they simply won’t fund the loan.  “You can lead a horse to water,” as the saying goes, “but you can’t make him drink,” or for that matter, a lender, fund.  But, this is a rarity. 

The interest rate lock-in period should be long enough to cover the average time for processing loans in the local area.  Also any special factors that might delay the settlement of the loan should be considered e.g., doing credit repair like a “rapid rescore” to obtain a better rate.  If the lock-in period is exceeded, rate lock extensions can be obtained but they can be costly.  Lenders may grant a brief extension of 2 or 3 days for gratis.  On the other hand, an extension of a week or two may cost the borrower or the broker anywhere from a quarter, to a half or even a whole point.  It depends on the state of the credit markets.

The lock-in is important to the consumer because it provides assurance that the interest rate will not increase while the loan application is being processed and while work is underway to prepare, document and evaluate the loan application.  When applying for a mortgage loan and determining the timing and length of a rate lock-in period, there are many personal factors that should be considered.  It’s important to discuss it in detail with a loan officer because should rates drop, there’s no re-locking at a lower rate once the rate has been locked.

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