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. Your decision as to what type of rate lock to get, and how many points to pay, should depend on the volatility of New York mortgage rates.

After a lock expires, most lenders will let you re-lock at the higher of the original rate/points or current rate/points. In most cases you will not get a lower rate if rates drop.

Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.

Some lenders do offer free float-downs––i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch––the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate.

Please note that at Centennial Mortgage, we offer the lowest available New York mortgage rates.

What do you do if the New York mortgage rates drop after you lock?

Most lenders will not budge unless the rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let the borrowers improve their rate every time the rates improved, they spend a lot of time relocking interest rates, since rates fluctuate daily. Also they would have to build 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. If you are shopping for a house, some lenders offer a lock-and-shop program that lets you lock in a rate before you find the house. This program is very useful when rates are rising.

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 180-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.

For those of you in California, our southern California home loans expert Ken Go guarantees all rates and fees. That means that the rate you are quoted at the beginning of the loan process is guaranteed to be the rate you get. For more information, check out Ken Go's California home loans blog.

 

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