The Veridian Blog

A rate-lock is a lender’s commitment to an applicant to loan money under specified terms, including interest rate, term, amortization period, payment, origination fees (points), and discount (or rebate) points.  The longer the lender has to commit, or guarantee these terms, the less favorable the terms will be for the applicant.  In simpler terms, the interest rate and/or points will be higher for longer rate-lock periods.  Therefore, the best terms available will be reserved for the shortest lock-in period.  The risk associated with the short rate-lock period is that the applicant must be sure they can close the loan transaction within the given time frame and also hope that interest rates do not move before they reach that stage of the process.

For example, two typical rate-lock periods are the 15-day and 30-day locks.  Traditionally, an applicant could lock a rate, say 6.0%, for 30-days, submit his application to underwriting, have it be approved, clear conditions, sign papers, and fund the loan within 30 days.  Alternatively, the applicant can also choose to submit the application without locking (called a “float” loan), have it underwritten and approved, clear all conditions, and then lock the 15-day rate.  The risk is, the rate may fluctuate higher from Day 1 to Day 15 and the borrower, particularly in a purchase transaction, may prefer not to be put in that position.  But for those risk-neutral borrowers, they can be rewarded by the lower rates offered by the shorter 15-day lock. 

In a declining interest rate environment, as we have seen thus far in 2009, the prevailing strategy is to wait as late as possible for the shortest rate-lock period that offers the best mortgage rates.   This has become the preferred choice as the spread between 30-day and 15-day rates has widened further since the beginning of the year.