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Updated:         June 4, 2018

When interest rates trend upward, borrowers are more concerned about protecting themselves by "locking in" their loan rate. A rate lock is a lender's commitment to loan money at a pre-determined interest rate and fee and to hold such commitment for a pre-determined time period. It is also a commitment from the borrower to complete the loan with the agreed upon terms.

The primary factor that determines pricing is the length of time for the lock period. A lender, for instance, might "guarantee" a borrower a 5.25% interest rate at a cost of 1 point origination/discount fee as long as the loan transaction is completed within 45 days. If the lock period were for a shorter period of time (i.e. 15 days), perhaps the rate or the fee would adjust downward. Should the loan transaction not be completed within the lock period, it will expire. The typical rule upon expiration is that the borrower would be required to accept (within 30 days following the lock expiration) either the lock rate or current market rate, whichever is higher. This is to discourage borrowers from merely letting a lock commitment expire just prior to closing escrow with the expectation of acquiring a lower rate.

Obviously, borrowers would prefer a rate lock system that allowed them to protect themselves from upward motion of interest rates but take advantage of any rate reduction that might occur during their lock period. Called a "float down", these arrangements are generally not available anymore, but most lenders will consider re-negotiating the rate should a “significant” reduction occur.

Rate lock periods vary . . . usually 15, 30, 45 or 60 days. When the lender is expected to "hold" the rate for more than the 15 day period, the origination/discount fee usually increases slightly depending upon the length of the lock, market conditions and the consequent "risk" to be absorbed by the lender. Any additional cost can also depend upon the type of loan acquired (i.e.; fixed, adjustable, conventional, FHA, USDA or VA).

Most loans can be locked at the time of application or at any time during the loan processing period. Some "jumbo" loans (i.e.; those loan amounts in excess of $453,100) can be locked only for a maximum of 45 days, or, in some instances, may be locked only after lender/underwriter approval.

Potential home buyers who regularly compare rates by calling lenders for their "daily quote" can be confused when they are given varied rates because each lender may be quoting for a different lock-in period. Be certain that one is obtaining true comparison quotes when "shopping" rates. It is advised that borrowers schedule a free pre-qualification interview rather than merely shop rates. An interview will let the lender suggest the appropriate loan product to meet the borrower's particular financial need(s). At the same time, the lender can provide some guidance as to the best time frame for locking your loan.

The alternative to locking in the rate is to allow the loan to "float the market" during the loan processing period. The borrower can elect at anytime during this float period to lock their loan or the loan can continue to float toward the final stages of the loan process. The question, then, is should one lock or float? This is usually the borrower's decision alone and can seem like a bit of a gamble. While no one can know for sure what interest rates are likely to do over any particular period of time, consultation with the Lender and Realtor(s) is always available to assist in trying to acquire the "best" rate possible.

One final thought . . . after deciding to lock your loan, don't second guess your decision. Remember, you selected the rate, you can't change it, stop worrying about it. An eighth of a percent is likely to make little difference in your payment anyway, so don't make yourself crazy over having missed that very lowest rate.

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