With interest rates unpredictably volatile, the good faith estimate you receive when looking for a mortgage may not be the actual interest rate you end up with at the time of closing. Interest rates can change every day, so to combat this, borrowers have the option of “locking in” the interest rate and points for a set amount of time to ensure their stability.
There are many ways to lock in a loan, depending on your lender, but the most important thing, no matter how it is done, is to get it in writing. A verbal agreement will not cut it, and if the lender refuses a written contract, change lenders. The commitment should specify the number of points as well as the locked interest rate and the period of time before it expires, usually 30 days.
This privilege usually requires you to pay a slight interest rate premium. The lender will also require some show of commitment on your part in the form of an application fee, appraisal, or credit report.
Don’t try to guess where interest rates are going when deciding whether or not to lock a loan. If you wouldn’t be able to qualify or afford the loan with a slight increased amount, locking the interest rate is a good idea. If you can withstand a certain amount of risk and are confident the loan provider will offer the true market price, consider delaying it. The price is lower for shorter lock periods than longer ones.
Locking in the interest rate when rates go up is obviously beneficial to the borrower, but when rates go down, you still have a few options. Some locks have a float-down feature, which protects the borrower only if the rates rise. If they drop, the current interest rate can be used. The cost for this is usually a little more. For example, if a lender charges one point to lock the interest for 60 days, a 60-day float-down may cost 1.5 points.
Even if you do not have a float-down feature on your lock and the interest rate drops by half a percent, you should still call you mortgage broker or lender and ask if they will work with you. If you have a week or so until closing, they may not budge because they know it would take too much time to try to negotiate a new loan. If there are a few weeks left until closing, they may compromise on the rate so as not to lose your business to a different lender.
You can also walk away, though you will probably lose the application fee or money you have already paid. Deliberately slowing the process down so the lock expires to get the lower, current rate, will not always work. Some contracts will take the higher of the two rates in that case.
Sometimes locks expire before the loan closes. If you feel the lender is intentionally waiting for the lock to expire, you can complain to its regulatory authority, although it is difficult to prove who is at fault. Make sure that you submit all of your documents on time and are available for questions so you don’t hold up the process. If the expiration date is nearing, stay on top of the broker or lender to try to push it through for closing.