How Does Locking A Rate Work?

When you have an accepted offer on the purchase of a home or when you are ready to move forward on a refinance you are able to lock your interest rate in. When you lock your rate you are locking for better or for worse. The rate you locked in is the rate you'll close on, meaning if rates come down after locking you don't get the lower rate, however if they go up after you lock you don't have to take the higher rate. 

There are often questions about whether or not to lock in your rate when your offer is accepted. My advice is almost always going to be to lock the rate. This protects you from rates increasing, and if rates decrease while your loan is in process you will just be closer to a refinance making sense in the future. Many loan officers like to try to play market guru. Unfortunately mortgage rates in the short term (within a few months) are incredibly hard to predict. The experts that predict mortgage rates for a living only get it right about 55% of the time. It is always your option of when to lock your rate in. Sometimes there are other variables at play, such as a close date that is a ways out. But in general locking is the safe bet. There is no up front cost to lock your rate in. 

When you lock your rate you are locking it in for a time period. Typically 15, 30, 45, or 60 days. How long we lock the rate depends on when the closing date is on your purchase agreement as well as how long we believe it will take to complete your loan process. If for some reason we get to the expiration of your rate lock you will need to pay to extend the lock period before expiration if you still plan to move forward with the loan. The cost is added to closing costs so it is only a cost you incur if your loan closes.  If your lock expires and you plan to move forward with the loan you will get what is called worst case pricing, meaning if rates have gone up you will lock in the new higher rate, but if rates have come down you'll take the original rate you locked plus extension costs. It is not in your interest to let your rate lock expire. There are some nuances with costs to extending your rate between lenders and it can be situational to your transaction so I won't go into details on specific potential costs. In general the longer you have to extend your rate lock the more expensive it is, and it can get fairly expensive, so we want to avoid that if at all possible. You can help by always responding to requests as quickly and thoroughly as possible. 

There are multiple rates available with any lender. Higher rates will have a lender credit associated which means money you get for taking a higher rate to cover some closing costs while lower rates will have a cost or "discount points" that you'll pay to take a lower than market rate. Sometimes there will be a "par" rate meaning a rate that doesn't have any cost or credit, but often there isn't a par rate so you'll opt for a rate with either a small cost or a small lender credit. Your HOMES Mortgage Lending loan officer will be able to go into your specific options when the time comes to explore locking your rate. 

To provide some insight on why rate locks work the way that they do: When you lock your rate with a lender they are guaranteeing a rate today that they will need to honor after your loan closes. For this reason the lender will hedge against the market so that they don't lose money if rates go up. That hedge costs them money regardless of if rates go up or down, which is why if rates go down you will still have extension costs, and why you won't be allowed to just take the current market rate. For this reason it's important to be aware of when your rate lock expires. If you get within a week of that expiration date and your loan isn't yet scheduled to close you should talk through your options and potential costs for your specific loan with your loan officer.

For a more in depth look at mortgage rates and what causes mortgage rates to fluctuate go here: 

https://www.homesmortgagelending.com/mortgage-rates/what-causes-mortgage-rates-to-fluctuate