In many cases, you cannot close a mortgage loan without locking in an interest rate.

Generally there are 4 primary components of a Rate Lock; loan program, interest rate, points and length of the lock.

The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.

Let’s say you lock in a 30-year fixed loan at 8.5% with 3 points for 15 days on March 5. This lock will expire on March 20th (if March 20th is a holiday then the lock is typically extended to the first working day after the 20th). The lender must disburse funds by March 20th, otherwise your rate lock expires, and your original rate-lock commitment is invalid.

The same lock might cost 3.25 points for a 30-day lock or 3.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate.

After a lock expires, most lenders will allow you to re-lock at the higher of the original rate/points or current rate/points. In most cases you will not get a lower rate if rates drop.

Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.

Some lenders do offer free float-downs––i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch––the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate.

New-construction rate locks.

There are also rate lock options for new construction. These locks can cost more and most likely will require an up-front deposit. For example, a lender might offer a 120-day lock for 1 point over the cost of a 30-day lock, with 0.5 points being paid up-front, as a non-refundable deposit. Many long-term new-construction locks do offer a float-down––i.e. if rates drop prior to closing, you get the better rate.

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