Interest Rate Locks

What they are and how it affects you

Interest rates change every day. There are long term trends and short term trends. Although interest rates in general may be rising over time over the course of a month, there can be times when it falls for days at a time (by small amounts).

Interest rate changes affect you two ways:

• When your are mortgage shopping

• After you get your loan

Shopping for a loan

When you are shopping for a mortgage you will get quotes from lenders and brokers in the form of a “good faith estimate” (GFE). This good faith estimate is a ball park estimate of what your costs will be. It is not a guarantee of fees.

The rate you are quoted is not “locked”. A loan is locked when the lender provides a written commitment to offer an exact loan program and rate for a given period of time. This is usually after your loan is approved, but can be done before this.

For example, after you pick a lender your loan may be “fixed” as a 30 year fixed with a 6.8% interest rate, with the lock period being 45 days. This means that this offer is good for 45 days. If you don’t wrap up your loan by then, the rate is no longer guaranteed. At that time, the rates may have gone down or up. Some lenders may extend a rate lock for another time period, usually by charging an additional fee.

The rate you are quoted in your good faith estimate may differ from the rate you are locked in at. Rates change every day. If you pick a specific person to work with on the loan, you may be able to check with them over several days to see how the interest rates are, and then request a “lock” at the time you feel that the rates you wanted are available. One drawback to this is that rates may continue to rise the longer you wait.

A rate lock is a written commitment. If you are working with a lender and you are told your loan is locked, you may want to request a copy of this. Sometimes the loan locks are:

• not really locked (the lender is playing the market to see if they can get an even lower rate and lock you in at a higher rate and pocket the difference as a profit)
• they are locked at the wrong rate
• the wrong loan type
• for a wrong lock period

The rate you end up with may be different than your good faith estimate. This can simply be because of market forces and not locking the loan in on time. It is not necessarily a “bait and switch”. A good faith estimate is an estimate only.