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Locking in Interest Rates
Borrowers should lock in their interest rate at the earliest opportunity. Gambling with an interest rate is never advisable. In mortgage loan business, there is a standardized system in place that all loan officers adhere to for all of our clientele.
A mortgage loan cannot be closed without locking in a rate, and there are three main elements to take into consideration:
- Interest Rate
- Points
- Length of the lock
Locking in on a rate does not obligate the client to commit to the loan until the loan is actually closed. The lock simply eliminates any risk of the borrower being exposed to market volatility. It provides the security of having time to complete the mortgage and Real Estate transactions with some sense of order. The lender must disburse funds to complete the transaction within the rate-lock period, or else the original commitment to provide a loan at a certain interest rate will expire.
When a lender permits an extended lock-in period, the borrower will usually see either a higher interest rate or more points associated with the loan. The lender does this to minimize their own exposure to market volatility; hence the borrower pays for the lender to take on this risk
For example, a 30-day rate lock commitment may cost the consumer one-half point, while a 60-day rate lock commitment could cost 1 full point. If the borrower needed an extended lock period, but did not want to pay points, the lender could make up the difference in the interest rate. In this case, typically, a 60-day lock would have a higher interest rate than a 30-day lock
In this business, the standard procedure is to lock in a rate as quickly as possible upon receiving the loan application. Mortgage advisors know that while interest rates fluctuate daily, most lenders do not want to lose any business. In many cases, if there is a significant rally in the market that causes interest rates to drop 0.25% or more, your Mortgage advisor can ask the lender to renegotiate the rate. Often the lender allows for a renegotiation to avoid potentially losing the loan to another lender.
To allow borrowers to sit on the fence and not lock in a rate quickly, would leave them exposed to market volatility. Then, if rates do increase, the borrower may be unable to qualify for the loan they want, which is a situation that should be avoided at all costs.
