Unless you are in the middle of a loan process or work in the financial industry, odds are you have never felt the need to understand what a Rate Lock is and why understanding it is important.
A rate lock is essentially freezing a moment in time to minimize any cost changes to you during the loan process.
When I first discuss rates and strategy with my clients, we go over what is available at that exact moment in time in the market. By the time you are ready to move forward in the loan process, those costs and rates may have changed.
Watching rates is sometimes called floating. This can be a double-edged sword a lot of the time because the markets that control these rates change daily, sometimes hourly. Imagine a stock ticker going across your TV screen that is constantly changing, that’s what rates do. Lenders have departments that change rates called the secondary market and the people in these departments constantly are the ones watching the stock tickers and making the changes that filter down to us.
As you can imagine, lenders will make knee-jerk reactions to large stock market movements and geopolitical events. These events and movements can have a positive or negative effect that filters all the way down to a buyers loan rate. When something negative happens, those lenders that are watching the tickers, well they are very quick to make rates get worse as we watch interest rates rise. On the other hand, when we see positive movement, it is often a much longer time frame, or a much larger movement in the positive direction and we see rates drop. While we watch the markets for you, these movements can happen quickly and we may have to make a split second decision for you.
If this happens, which likely it will, we are still going to circle back as part of the finalized structuring and revisit all of the available rates that were offered at that moment in time when we locked the loan. We still have complete flexibility to choose any rate within that locked rate sheet. By locking, we’ve locked in a snapshot in time, not necessarily your final rate. But, we’re also going to try to get as close as possible to what we think fits best for your strategy right now too. So it’s not like we’re just throwing darts over here… Long story short, there will still be choices and options but we will have removed volatility and chance from the equation.
Ok, you rate is locked now what?
Rate locks are done for a fixed period of time. The most common is 30 days, however there are other options. We will choose this option based on your overall loan strategy. Once your rate is locked it is very important to get all of your documents requested back to us in a timely manner. The reason is, if we run out of time on the rate lock, we will need an extension. Extensions are an added cost to the loan that varies lender to lender and is based on the amount of time you need to extend. Some lenders even have a limit on how long you can extend before being subject to the current market rates again.
I hope this article helped you out and brought some more understanding to you and your loan, or potential loan situation. Any questions about your rate lock or when you should lock are always to be directed to your loan officer. We will be able to give you the most up to date accurate information and discuss overall strategy.
Have an amazing day!