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Lock Your Rate When You Apply, or When You’re Ready to Close?

Obviously, your clients want to find the lowest possible interest rate on their mortgage. Since interest rates can fluctuate daily, consumers can use rate locks to protect themselves from increases while they wait to close on their loan. Orion’s brokers live and breathe this, but let’s go through some basics surrounding rate locks, starting with…

What is a rate lock? It is a guarantee that the lender will honor a specific interest rate at a specific cost for a set period, thus protecting the borrower from market fluctuations. If the broker or their client chooses not to lock in their rate, this is known as “floating” a rate, not a bad strategy when interest rates are generally falling, but potentially costly in a rising-rate environment. This business is one of the few where a price can be guaranteed in the future. Think of another one!

When exactly a rate can be locked depends on the lender, as some will lock in a rate once the borrower is pre-approved with just an address of a prospective home while others might wait for the seller to accept the offer. Our brokers know that if one locks too early and you run up on the expiration date, there could be extension fees or a reset of the rate to the prevailing market rate. A rate can be floated until the day of final underwriting and the float is typically 30 to 60 days, but it might be longer at a cost.

Speaking of costs, Orion’s brokers know that rate locks aren’t free, but most lenders do not charge a separate fee for rate locks within a certain period of time. Borrowers do have the option to pay points for a lower rate (one point equals 1 percent of the loan amount). The cost of a rate lock is baked into the rate a borrower is offered, and only costs them out of pocket if they want a longer duration, upfront or at time of extension. Fees are usually charged by the lender when the rate lock expires and the borrower wants to extend the lock period. If the rate lock does expire before closing, the lender may offer to extend the rate lock, either free or for a fee unless the company’s management has determined that combination of rate and points might no longer be available and the loan would be based on the new prevailing terms.

Brokers explain to clients that locks for 30 to 60 days don’t usually have a fee. After that, the borrower might have to pay a fee to extend the rate lock. The longer the time period, the more risk there is.


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