The Key to the Loan Lock and the Interest Rate

The answer to the first question is relatively simple. Since mortgage rates can change from week to week, day to day, and sometimes during the day, a loan lock guarantees home buyers a specific interest rate on their mortgage. This lock preserves the interest rate from the time the loan is approved or pre-approved until the actual closing occurs.

Its importance to borrowers is great. With interest rates generally rising, even a modest one quarter of one percent rise in interest rates can cost borrowers hundreds, even thousands, of dollars each year. That may be a relatively small amount when compared with the total amount borrowed, but to the borrowers, paying that additional money can make budgeting tougher.

For example, a $600,000 loan for 15 years at 6.00 per cent will have a monthly mortgage payment of about $5,063. That same loan, with an interest rate of 6.25 per cent, would have a mortgage payment of about $5,144. At 6.5 per cent, that same mortgage payment would reach $5,226.

Shelley Puentes, a mortgage broker with Diablo Funding Group, says it is important to be sure the loan is locked and not just assume it is. “There was a time, about a year ago, when some mortgage brokers were saying they locked the loan and they didn’t. They were playing the market, because interest rates were going down.”

Puentes doesn’t like that approach for several reasons. “First, I don’t gamble,” she explains. “And the other reason I don’t do that is, simply, people don’t like that, and I work with a lot of referrals.”

Puentes also points out that mortgage brokers often earn their money by selling loan products at a profit. A mortgage broker may earn a commission paid by either the lender or the borrower, or charge a fee to either party, or do some of both.
That means a fluctuation in interest rates can hurt a broker’s compensation. But Puentes says accepting the short-term reduction in commissions or fees is far preferable to surprising a borrower with a higher-than-expected interest rate. “Even if I lose money, I’m not going to go back on my guarantee,” she explains.

But all mortgage brokers are not necessarily so scrupulous. Before the closing, when a borrower is most likely to learn the interest rate wasn’t truly locked, Puentes encourages home borrowers to confirm the interest rate is truly locked. “The only things a consumer can do is to either ask to see the lock certification from the lender, or really know who they are doing business with,” she explains, noting the lock certification is an actual document from the financial institution confirming the interest rate has been locked.

But borrowers can try to have it both ways, too, which can also lead to problems. “We always have to let borrowers know that a loan lock will lock their rates in the event a mortgage goes up or down,” explains Neil Sheth with Wells Fargo Home Mortgage in Fremont. That means if interest rates fall, the borrower may not get the lower rate without paying additional fees.

“I generally let them know, when they’re locking the rate, that the market is hard to control. Once you are locked, you are locked. There is a cost to unlock and relock it again, and it may not be worth that kind of cost,” Sheth explains.
Sheth also says that, because Wells Fargo is funding the loan directly, a loan lock is easier to confirm. “We let clients know that when we lock the rates, we have an advantage, because we are the direct lender,” he notes.

Since the loan lock comes after the loan is approved, near the end of the loan application process, obtaining a loan lock is not dependent on any additional documentation from the borrowers. “I’ve never not been able to lock a loan” once the loan itself has been approved, Sheth advises.

In fact, some types of borrowers may be able to obtain loan locks for a longer time period. “We have a Builder Best Program that allows the loan to be locked for up to one year,” Sheth explains. The program is designed for buyers of newer homes that are still under construction. Such buyers may have an uncertain period of time between the release date of their home and the actual closing and move-in date, so the program helps alleviate some of that uncertainty.