Any rate quoted to you by a lender or mortgage broker is subject to change. Even when there are no major trends of rates increasing or decreasing, rates change daily. Since even one-eighth of 1% can mean a difference of thousands of dollars over the life of a loan, it is important at some point to have the lender commit to a definite interest rate. This is called locking in the rate. There will be a fee charged to lock in the rate, which will vary depending on the duration of the lock. Locking in your rate for sixty days will cost more than locking it in for thirty days.
When rates are falling, lenders will offer a low-cost lock-in fee or even lock in your rate for free. Some will offer a float down. This means that if the rate falls after you lock in, you can get the lower rate. Common practice is that if rates fall after you lock in, you pay the higher rate. Lenders say they are taking the risk that rates will rise, so the borrower should take the risk that rates will fall.
The liberal policies, like no-fee locks and float downs, are usually for adjustable rate loans only. The lock only applies to the start rate, which will last no more than a year (more likely three to six months). The rate then adjusts as agreed in your loan documents, regardless of your lock-in rate. The lock on a fixed rate loan can set the interest rate for as long as thirty years.
Lenders’ lock-in policies vary, and you should be clear that you understand the policies of the different lenders that you are considering. Ask for the information on rate lock-ins in writing. The policies are not simply in the mind of your loan representative. They are written somewhere and should be made available to you so that you can make a well-educated decision.
A lender will have a policy less favorable to the borrower on a fixed rate loan compared to an adjustable loan, since the rate will not change over the entire loan period.
If you know your lender’s policy regarding locking in your rate, you have one more bit of knowledge to help you decide which lender to use. The lender with a less favorable lock-in policy may still offer the best overall program. You will not know this unless you know all aspects of the cost of loans, including lock-in costs.
When rates are rising, lenders charge more for locking in the rate and sometimes a disproportionate amount for a long lock-in. It is important that you compare the costs of the lock-in periods and weigh them against the chances of rates increasing that quickly. If rates are relatively stable, you can usually save money by locking in closer to closing time, such as thirty days rather than sixty days. A good loan representative or mortgage broker can keep track of rate changes daily. If there is a little dip, he or she can alert you to lock in. You can follow mortgage interest rates yourself in financial newspapers, financial sections of some major newspapers, or on the Internet. Type “mortgage rates” into a search engine and take your pick.