A mortgage rate lock guarantees the interest rate, at a certain price, for a specific time period, and protects the interest rate from market changes.
Most mortgage companies will require an executed contract before locking an interest rate. This is not the case for us. Check out our Lock & Shop program for more details.
Mortgage Rate Lock
A mortgage rate lock secures an interest rate for a home loan and freezes it from future market movements. If a rate is not locked then it is “floating” and is subject to change daily.
Rate Lock Example
If an interest of X% gets locked and afterward the rates increase, the mortgage rate lock protects the rate from changing and keeps it at X%. Conversely, the market could get better after locking and as a result interest rates fall below X%.
Unfortunately, the mortgage rate lock keeps the interest rate at X%. Our recommendation is that if you’re happy with the rate quoted, lock it and don’t look back.
If you’re happy with the rate quoted then lock it and don’t look back.
A mortgage rate lock is finite and has an expiration date. An interest rate lock is typically good for 30 days and it’s free to lock an interest rate. Most lenders do not charge a mortgage rate lock fee for locking the rate. Note: if you’re doing an longer lock period – such as 120 days or more – then there may be money required upfront before locking.
For purchase loans, an executed contract generally triggers the time to lock the rate. For refinance loans, a mortgage rate lock is typically done once all supporting documents have been provided and a refinance appraisal is ordered.
The locked rate is not the APR
The mortgage interest rate is not the same as the Annual Percentage Rate (APR). The mortgage interest rate is what determines how much interest is actually paid on a loan.
How Often Do Rates Change?
Mortgage interest rates change daily. In fact, they can change throughout the day depending on the market’s volatility.
But here’s the thing – and get ready to have your mind blown – the truth is that rates DON’T EVER change. What changes is the amount of money required to get the original rate.
The majority of homes loans are priced with zero mortgage points and zero lender credit so that the interest rate doesn’t have additional costs. That’s why rates “change”. To keep the closing cost structure the same (i.e. zero points paid) the interest rate increased more than the original X% when the market gets worse.
Rate change example
Let’s assume today’s rate is X% with zero points. Then the market gets worse and rates “go up” half a percent to X.5%. What really happened is that the original rate of X% now has points associated with it.
There is an indirect correlation between your home loan interest rate and the amount of you pay and/or the credit you receive with your closing costs. Points paid at closing lower the interest rate.
By contrast, a lender credit can result in a higher interest rate but it lowers the costs to close.
How are Rates Determined
Your mortgage interest rate is a product of the Mortgage Backed Security (MBS) market.
Mortgage Backed Securities act like bonds; supply and demand determine the price and yield. Global events and other financial markets (like the stock market) impact the value of the MBS market.
A common misnomer is that home loan interest rates are based off the 10-Year Treasury Note. This is inaccurate. While there is a strong and direct correlation between the two, home loan rates are not determined by the treasury.
The Fed doesn’t (directly) control mortgage rates
When the Federal Reserve raises or lowers “interest rates”, they are actually controlling the Fed Fund Rate, not mortgage rates. Certainly a change in monetary policy has a significant influence on long-term home loan interest rates but it’s not immediate.
The only home loan rates with a direct impact from the Fed’s actions are for home equities line of credit (HELOC) and adjustable rate mortgages (ARMs). Fixed rate mortgage interest rates are a product of what investors will pay for the Mortgage Backed Security (MBS).
You and your loan program
You and your loan program also influence the interest rate. Different programs will have different adjustments and add-ons to the rate.
Fannie Mae’s LLPAs
If you really want to nerd out, check out Fannie Mae’s loan level price adjustments (LLPAs). Their matrices show how different LTVs, credit scores, loan purposes, etc. influence the rate. Fannie’s table shows the additional points that get built-in to the rate.
Loans with Waived Escrows could even have higher rates due to the 25 basis point LLPA from Fannie and Freddie. FHA and VA rates will differ than those from Fannie and Freddie.
When Can I Lock?
Common questions are “when can I lock my interest?” and “what is the best day of the week to lock in mortgage rates?” First, there isn’t a “best” day to lock a rate. As mentioned above the market’s change daily due to global markets and international events.
A mortgage interest rate can be locked once the lender has the following:
- a full loan application
- signed loan disclosures
- all supporting documents
- a proposed closing date
1. Full Loan Application
For example, if you were pre-qualified seven months ago then we’ll need to update the application to ensure it’s accurate and that you’re still pre-approved.
2. Signed Lender Disclosures
The Lender Disclosures are emailed to you by our disclosure department during the loan packaging process. You will need to return the e-signature documents and the “wet” signed docs for us to move forward and issue a mortgage rate lock.
3. Supporting Documents
We should have most of the supporting documents if you’ve been pre-approved. We most likely will need updated time-sensitive documents like pay stubs, bank statements, etc. if the existing docs are older than 60 days.
4. Proposed Closing Date
For purchases, the purchase contract typically determines the closing date. There are a few exceptions to when a contract won’t have a definitive closing date. Some examples would be if the contract is contingent on the sale of another home, a short sale, or for new construction.
How to Lock In a Mortgage Rate
Once the aforementioned items have been provided we can do a mortgage rate lock. We ask that you email MortgageMark@MortgageMark.com instructing us to lock the interest rate so as to protect everyone from the “he said, she said” about something so important.
To lock in a mortgage rate we need you to send an email (before 4:00 pm CST) requesting us to lock the rate. Please copy everyone on the loan. The reason for this is because we don’t want one spouse telling us to execute a mortgage rate lock today, then tomorrow have the other spouse upset because they were left out of the process.
The reason we ask that you email us before 4:00 pm CST to allow us enough time to lock before the end of business the day. Please call us if you have any questions as we’re here to help.
Semi-Frequently Ask Questions
How Will I Know the Rate is Locked?
The disclosure team will send you updated disclosures showing the terms of the rate lock agreement. Likewise, the Mortgage Mark Team will also provide a lock confirmation email with an updated Loan Summary worksheet to outline the payment and closing costs.
Does locking mean your loan is approved?
No. Locking your rate has nothing to do with your approval. Check out the mortgage loan process for details on the approval process.
How long can a rate be locked?
A typical mortgage rate lock is good for 30 days. Typical lock periods are for 15, 30, 45, 60, 75, 90, or 120 days. The longer the lock period, the higher the rate. The extended lock program allows the interest rate to be locked beyond 120 days.
Mortgage Rate Lock Extension Fee
A lock extension fee may be charged if a mortgage rate lock expires before closing. Often times the fee is 12.5 basis points for 7 days and 25 basis points for 15 days. (Note: 12.5 basis points on a $100,000 loan amount is a $125 fee). Sometimes we can get two to three days at no cost.
Can I Change My Rate After Locking?
Yes, if time allows. When a mortgage rate lock is issued the loan is being locked on that day’s pricing, not the actual rate. Meaning the rate can be changed.
For example, let’s assume you locked an interest rate last week with no points. Now you decide that you do want to buy-down the rate and pay mortgage points as part of the closing costs. This is absolutely permissible SO LONG AS closing is more than a week away and/or your loan hasn’t been submitted for final underwriting approval.
We need to ensure there’s enough time for the Underwriter, the Closer, and the title company to prepare the loan for closing. Changing the loan terms requires the loan to be resubmitted for final underwriting approval and opens up the possibility for additional underwriting conditions.
Can I Change Programs or Loan Terms?
Depends. As mentioned above you can change the rate and costs structure after locking. Typically you can also change the loan amount and/or the down payment amount.
What you can’t change is the program type. In other words, you can go from a conventional loan to an FHA loan. The mortgage rate lock will be forfeited if you change program types. Likewise, if you decide to go from a 30 year to a 15 year loan, the mortgage rate lock will be negated.
Is Everything Above Absolute?
No. It’s impossible to cover all the possible scenarios. This page is a very, very good outline and mostly accurate. As always, call us with questions and we’ll be happy to help.
Loan Officer, NMLS # 729612