How Does a Mortgage Interest Rate Lock Work?

A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain cost for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate when you file your application, when your initial disclosures are received, during processing of the loan, when the loan is approved, or later. Forthright Funding will lock the loan in after we receive the signed initial disclosures (returning clients will enjoy the perks of being able to lock their loan instantly).

A rate lock works just like options for stocks: the lender is committing to sell a mortgage at a specific price in the future (10-90 days typically). With Forthright Funding, we lock our loans on a 30 or 45 day lock (depending on loan type). The lock-in period should be long enough to allow for settlement of the loan before the rate lock expires. Time costs money when it comes to rate locks (and everything else), so keep in mind that you will pay a premium to have a longer rate lock.

While Forthright Funding and it’s Loan Officers will do everything in their power to get your loan to close before the rate lock expires, keep in mind that other factors can cause delays. For example, your loan approval could be delayed if the lender has to wait for any documents from you or from others such as employers, appraisers, termite inspectors, builders, and individuals selling the home. On occasion, lenders are themselves the cause of processing delays, particularly when loan demand is heavy. This sometimes happens when interest rates fall suddenly.

When the rate lock expiration date is coming up, there are different ways to handle it:

• Borrower can chose to do a rate lock extension.
• If the market is better than when the loan was locked in, many lenders will let you re-lock the loan at the original commitment.
• Let the loan expire and re-lock the loan at current market conditions (note, this will not get you a better deal; only worst of market).

There are some things that a client can do to avoid potential issues with the rate lock:

• Should we ask for additional documents, send them in as soon as possible.
• Be upfront about all that you know: We don't know if you have a silent second mortgage on your home, we don’t know if you are going to be out of the country for 2 weeks, we do not know that you have not filed last year's taxes yet, etc.
• Do NOT take two weeks to schedule your appraisal.
• If you have a side business, let us know up front.
• Call us to check the status of your application. We don’t mind!

Know that you have the option to float your interest rate. By doing so, you are assuming that interest rates will be getting better. This may or may not be a good idea as no one really knows how rates will change. Rate locks are always a guessing game. We’ll be the first to tell you that we don’t know where mortgage interest rates will be at any point in the future. However, in some instances Forthright Funding will be able to do a float down option for clients should rates get considerably better. That is, if you locked your rate in at 4.375% and before the loan went to settlement rates dropped down to 3.75%, we might be able to get you that interest rate (for a small fee).