Mortgage rate locks are supposed to protect you from rising interest rates while your loan originator prepares the documents necessary to close on your loan. What happens when your mortgage rate lock breaks? Broken locks occur when you aren’t able to close before your designated lock period expires. Ones your lock breaks the wholesale lender that approved your loan is no longer obligated to honor the mortgage rate you were approved.
What happens with the lender when you haven’t closed when your lock expires? The broken lock creates a problem for everyone involved. It’s more work for the broker, although some will argue they don’t do enough to warrant their commissions, and the lender has a problem because they’ve earmarked funds for your loan. This money is referred to as “hedged” and is budgeted to fund your loan when you close. If you miss your deadline for closing the lender is out the money they paid to earmark the hedge for your loan. This is why your interest rate goes up when you break your lock.
Suppose you’re refinancing your mortgage at six percent and the broker locked your interest rate for thirty days. You miss the deadline for closing and mortgage interest rates have gone up to seven percent. Even if mortgage rates had dropped you’d still be stuck with the higher of the two rates at six percent if you pursue the loan. If you anticipate problems when refinancing your loan ask for a longer lock period…and stick to it.
What If You Haven’t Locked Yet?
If your loan originator hasn’t locked your mortgage rate you have what’s called a floating interest rate. This is the complete opposite of being locked and your rate will change with market conditions. If mortgage rates go down prior to locking you’ll get a better rate; however, there are no protections in place for you if mortgage rates go up. If you’re in the process of refinancing and haven’t locked in your interest rate in writing, you’re taking a gamble with your loan. For most people the gamble of a lower rate is not worth the risk; have your loan originator lock in your rate, in writing, as soon as possible.
How Soon Can You Lock Your Interest Rate?
When you’re refinancing your mortgage you can lock in the interest rate at any time. If you’re satisfied with the interest rate your mortgage broker quotes you and are certain that it does not include unnecessary markup, ask your broker to lock as soon as possible. Once you’ve locked in your best mortgage rate make sure you return all documents and requests for information in a timely manner to prevent breaking your lock.
You can learn more about refinancing your home loan without overpaying by registering for our free mortgage refinancing videos; get started today by clicking the links at the top of this page.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
