How Do Rate Locks Work?

Most people typically lock in their rate early in the process. For most lenders, you can lock in a rate as soon as you find a property address. You can lock as soon as you submit an application if it’s a refinance. A rate lock is there to protect the consumer. The lender is basically hedging the market, so when you lock in the interest rate, you freeze some options. You can still choose between different options after a rate lock, but it’ll be based on that day’s pricing. If you lock your interest rate on a Monday and rates go up on Tuesday, your rate options are still based on that Monday.

So what happens if rates go down after a rate lock?

With most lenders, if rates go down slightly, you’re unfortunately stuck. However, if rates go up, you’re protected. It does vary depending on the lender, but if rates go down significantly, you can typically drop your interest rate. If it drops at least a quarter in rate at the same cost, you can do what’s called a rate lock re-negotiation.

Another thing to note: the longer the rate lock, the more costly it is. The reason for this is that the lender is setting aside more money for a longer period of time. Therefore, a 60 day rate lock costs more than a 30 day rate lock.

Why might you need a 60 day rate lock?

Let’s say you’re buying a home, but you’re not closing for 2 months. That’s where we come in. We help to decide whether it’s best to be conservative and lock right away, or if you should “float.” That’s the industry term for rolling the dice, risking the market, and waiting until you’re closer to a 30 day rate lock. 

Typically we recommend locking in earlier in the process because it does benefit the consumer most of the time. If rates go up, you’re protected. If they go down a little, yeah you’re out of luck, but if rates go down significantly, we can still get that lower price.

At Modern Home Lending, we’ll help you watch the market and determine the right time to lock in your rate. Call us to set up an appointment!