This tutorial explains the basics of locking the price of a mortgage, how to lock and why.

Tutorial on Locking the Loan
18 April 2006, Revised November 15, 2008

The lock period is the period during which the lender guarantees the rate and points. If an FRM is locked at 5.50% and 1 point for 30-days, for example, the lender is committed to make the loan at that price anytime within the following 30 days. Locks for longer periods are priced a little higher. Expect to pay another 1/8 point for each additional 15 days. During periods of market turmoil, as in 2008, the price difference between a short lock period and a long one will be a little higher.

If the loan has not closed by the end of the lock period, it expires; the lender is no longer committed. If prices have not increased during the period, the lender will usually be willing to extend the lock for a small additional fee. If prices have increased, however, any lock extension will be at the new higher prices. This is a risk you want to avoid.

On a home purchase, select a period long enough to include the expected closing date, plus a safety buffer of 15 days. On a refinance, the required lock period depends on how long it takes the broker or lender to process your loan. You get that period from them, then add 15 days just in case.

If you barely qualify at today’s rates, lock as soon as possible. You are in no position to risk an increase in rates.

If you are comfortable with the risk, you can delay the lock in order to take advantage of the decline in price as the lock period shortens. For example, if market rates don’t change, a 45-day price of 5.5% at 1 point 15 days later should become a 30-day price of 5.5% at 7/8 of a point.

This assumes, however, that you receive an honest reading of the market price on the day you lock. You will if you are dealing with an internet lender who posts your price on the internet every day. You are also safe if you are dealing with an Upfront Mortgage Broker (UMB) who gives you the best wholesale price on the lock day.

In other cases, you may or may not get an accurate reading. The loan provider who knows you are in too deep to back out may up the price a bit, so the 1/8 point will go in his pocket rather than in yours. Indeed, he might discover that the market price went up instead of down. With no independent check, the “market price” is what the loan provider says it is.

You can’t prevent an avaricious loan provider from pulling that stunt with you on a purchase transaction because you have too much at stake and not enough time to start over. That’s why I recommend that you lock as soon as possible.

On a refinance with any lender other than your current lender, you can prevent it because you have a right to rescind the deal within three business days after closing. The threat to do this will be sufficient to protect you against any kind of chicanery.

For more information about locking, read Why Is Locking Unique to Mortgages?, and Locking the Mortgage Is Critical In a Volatile Market.
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