What is a Rate Lock? -

What is a rate lock? It is an arrangement between you (the borrower), and the lender. Both agree to lock the interest rate for a certain period of time (as little as 10 days, as many as 180 days, 30 days is the most popular). Example: 30 year fixed rate conforming loan program with a rate of 4.5% locked for 30 days.

What if you lock a loan, then rates drop? You will not be able to break the lock getting a new lower rate. Remember you made an arrangement with the lender.

What if you lock a loan, then rates rise? The lender will not be able to break the lock getting a new higher rate. Remember the lender made an arrangement with you.

What if there is a large drop in rates? There may be room to negotiate with the lender. If the lender is not willing to negotiate, there is an alternative. I can take your loan to a new lender, capitalizing on the large drop in rate. We can lock with the new lender at the lower rate. Now, this does not sit well with the first lender. If this becomes a habit, the lender may stop doing business with me. But, looking out for the best interests of each borrower, it may be necessary to take this action.

What if there is a major change to the loan program? The loan lock could be canceled. A new arrangement must be made with you and the lender. This time, it will be based on the new loan program. Lets look at an example.

EXAMPLE: 30 year fixed rate locked for 30 days

A conforming loan is locked at 4.5%. A major change occurs. The loan is no longer conforming. The change is a larger loan amount. Now, the loan is a Jumbo. The 4.5% interest rate lock will not carry over to a Jumbo loan. The Jumbo loan will likely be over 5% interest rate. Why? Because it is an entirely different loan program with different risk elements. So, what happens? A new rate lock arrangement must be made by you and the lender. This time on a Jumbo loan. Beware, the lender will look at the initial lock of 4.5% and current market conditions. Whichever day has worse interest rates will be used for this new lock commitment. This is known as “worse case pricing”.

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