What is a rate lock?

You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:

  1. Loan program.
  2. Interest rate.
  3. Points.
  4. Length of the lock.

The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.

Let’s say you lock in a 30-year fixed loan at 8% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid.
The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate.

After a lock expires, most lenders will let you re-lock at the higher of the prevailing market rates/points, or the originally locked rates/points. In most cases you will not get a lower rate if rates drop. In some cases, prior to the rate lock expiration date, the lender may allow you to negotiate a rate lock extension at the original rate/points. An additional fee may be charged for this extension.

What happens if rates drop after you lock?

Most lenders will not budge unless rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let borrowers improve their rate every time rates improved, they’d spend a lot of time relocking interest rates, since rates fluctuate daily. Also, they would have to factor this option into their rates, and borrowers would wind up paying a higher rate.

Lock-and-shop programs.

Most lenders will let you lock in an interest rate only on a specific property, which means, if you are shopping for a home, you cannot lock in an interest rate until after you sign a purchase contract for a specific property. If you are shopping for a home, some lenders offer a lock-and-shop program that lets you lock in a rate before you find the home. This program is very useful when rates are rising. However, lock-and-shop rates are usually higher than the prevailing market rate. Also, the lender may charge a non-refundable fee or deposit towards closing costs.

New-construction rate locks.

Most lenders offer long-term locks for new construction. These locks do cost more and may require an up-front deposit. For example, a lender might offer a 360-day lock for 1 point over the cost of a 30-day lock, with 0.5 points being paid up-front, as a non-refundable deposit. Most long-term new-construction locks do offer a float-down–i.e. if rates drop prior to closing, you get the better rate.