Understanding Rate Locks as Rates Rise

Peter Boutell
Santa Cruz Home Finance


Whether a homeowner is refinancing or a homebuyer is borrowing money for a purchase of a home, a borrower seeking a fixed rate mortgage must make a decision to set the note rate, called a rate lock, that will apply throughout the term of the mortgage.

This decision must be made during the loan process, before the loan documents can be generated and signed by the borrowers. A borrower will typically lock in a rate with his lender for a 30 or 45 day period, depending on how many days it will take to close escrow.

It is also possible to lock in a rate for 60 or more days, if necessary. Rates that are locked for just 30 days are less expensive (less points) than rates that are locked for longer periods. The number of days required will depend on how fast the lender can process the loan and how soon the buyer and seller want to close escrow.

If interest rates are on the rise, as they are currently, securing a rate sooner rather than later would be appropriate. On the other hand, when interest rates are falling, locking in a rate toward the end of the loan process is advisable.

While we know that interest rates are as volatile as the stock market (up one day and down the next) we really never know for sure whether or not rates will be higher or lower at the end of the loan process than they were at the beginning of the process. A homeowner may lock in a rate as soon as the refinance has begun but a homebuyer must be in contract to purchase a specific property in order to lock in a rate.

Locking in a rate is a two-way street. That is, if the borrower locks in a rate, he will expect the lender to honor that rate even if rates go up. Conversely, if rates go down, the lender will expect the borrower to honor the rate that was locked in. Consider the example of buying a stock.

If you pay $110 for Apple stock today and it goes down to $107 tomorrow, it is too late to rescind your purchase at $110 per share. However, it has been our experience that if rates go down appreciably (0.375 of a percent in rate or more), we have been able to renegotiate rates downward for our borrowers.

In order to take advantage of the locked-in rate, the loan must be fully approved and the refinance or purchase transaction must fund by the expiration date of the lock period. If, for some reason, the transaction is not ready to close by the expiration date, the lock period may typically be extended for an additional fee.

When comparing rates with other borrowers, keep in mind that everyone does not get the same rate because rates are based on a myriad of factors such as loan origination fee (the more points you pay, the lower the rate), loan-to-value ratio, purpose of loan (receiving cash back can cost more in points), credit score, occupancy, loan amount, lock period, etc.

Also, when calling around or cruising the internet, remember that when it comes to getting a quote on rates, all of the above variables must be considered before an accurate rate can be quoted.