Demystifying How Rate Locks Work

Rate locks can freeze an interest rate on a mortgage for a specified period of time, typically for 30, 45 or 60 days (but can vary), and can strategically be used to benefit the home buyer.  But how exactly do they work? Let us help demystify just how rate locks work.

When you first get interest rate quotes over the phone, email or even see rates listed on a company’s website, it’s extremely important to understand those rates aren’t available to you. That is until you’re in a position to have that rate guaranteed in the form of an interest rate lock. One of the initial documents you’ll receive once you submit an application is a Rate Lock Disclosure or something similar. This document will tell you when you’re able to lock in a rate. But there’s more.

Interest rates are impacted by different factors. One is the type of loan you’re asking for. Your rate can also be adjusted based upon your credit score, down payment and loan amount. When speaking with a loan officer over the phone for the first time, you’re going to get rate quotes based upon the highest profile of a borrower. Someone with a 760 credit score and a 20 percent down payment will get a better score compared to someone with a 620 score and 5.0 percent down payment. Your loan officer might ask what you think your credit looks like and if you say “excellent” you’ll get quoted the best rate. But rates can change based upon your score. There’s no way to know what your rate will be until you have a completed application.

Next, understand that rates can fluctuate daily. Even intra-day rate moves aren’t unheard of. If something relatively significant happens in the markets, rates can move up or down accordingly. But until you get into a position to lock in that rate, you’re at the mercy of the markets.

Typically, a lender won’t lock in a rate without a completed application, a review of your credit report and an approved loan. A completed application, by the way, also means you’ve located a property. Either with a sales contract or via a refinance.

Finally, the longer you request a guaranteed rate the more expensive it will be. A 15 day lock period will be less expensive than a 90-day lock, for example. And remember, mortgage lenders take locks just as seriously as you do. If you lock in your rate for 30 days and it’s day 35, your lock is expired and you’re once again subject to the whims of the market.

When looking at mortgage rates, understand that nothing is guaranteed until the lender guarantees that rate in return.