A Consumer's Guide to Mortgage Lock-Ins
When you're looking for a mortgage, you're likely to shop
among lenders for the most favorable interest rate, and the lowest points and other
up-front charges. When you find the most favorable terms and the lender that you want,
you'll apply to that lender. But when you get to settlement, will you actually receive the
terms you applied or bargained for? Or will you find that the rate has changed-and that
your costs have gone up?
Lock-ins on rates and points might offer you a
way to ensure that what you shop for is what you get. This brochure explains what these
All About Lock-Ins
In most cases, the terms you are quoted when you
shop among lenders only represent the terms available to borrowers settling their loan
agreement at the time of the quote. The quoted terms may not be the terms available to you
at settlement weeks or even months later. Therefore, you should not rely on the terms
quoted to you when shopping for a loan unless a lender is willing to offer a lock-in.
What Is a Lock-In?
A lock-in, also called a rate-lock or rate commitment, is a lender's promise to
hold a certain interest rate and a certain number of points for you, usually for a
specified period of time, while your loan application is processed. (Points are additional
charges imposed by the lender that are usually prepaid by the consumer at settlement but
can sometimes be financed by adding them to the mortgage amount. One point equals one
percent of the loan amount.) Depending upon the lender, you may be able to lock in the
interest rate and number of points that you will be charged when you file your
application, during processing of the loan, when the loan is approved, or later.
A lock-in that is given when you apply for a
loan may be useful because it's likely to take your lender several weeks or longer to
prepare, document, and evaluate your loan application. During that time, the cost of
mortgages may change. But if your interest rate and points are locked in, you should be
protected against increases while your application is processed. This protection could
affect whether you can afford the mortgage. However, a locked-in rate could also prevent
you from taking advantage of price decreases, unless your lender is willing to lock in a
lower rate that becomes available during this period.
It is important to recognize that a lock-in is
not the same as a loan commitment, although some loan commitments may contain a lock-in. A
loan commitment is the lender's promise to make you a loan in a specific amount at some
future time. Generally, you will receive the lender's commitment only after your loan
application has been approved. This commitment usually will state the loan terms that have
been approved (including loan amount), how long the commitment is valid, and the lenders
conditions for making the loan such as receipt of a satisfactory title insurance policy
protecting the lender.
Will Your Lock-In Be in Writing?
Some lenders have preprinted forms that set out the exact terms of the lock-in
agreement. Others may only make an oral lock-in promise on the telephone or at the time of
application. Oral agreements can be very difficult to prove in the event of a dispute.
Some lenders' lock-in forms may contain crucial
information that is difficult to understand or that is in fine print. For example, some
lock-in agreements may become void through some unrelated action such as a change in the
maximum rate for Veterans Administration guaranteed loans. Thus, it is wise to obtain a
blank copy of a lenders lock-in form to read carefully before you apply for a loan. If
possible, show the lock-in form to a lawyer or real estate professional. It is wise to
obtain written, rather than verbal, lock-in agreements to make sure that you fully
understand how your lender's lock-ins and loan commitments work and to have a tangible
record of your arrangements with the lender This record may be useful in the event of a
Will You Be Charged for a Lock-In?
Lenders may charge you a fee for locking in the rate of interest and number of
points for your mortgage. Some lenders may charge you a fee up-front, and may not refund
it if you withdraw your application, if your credit is denied, or if you do not close the
loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage
of the mortgage amount, or a fraction of a percentage point added to the rate you lock in.
The amount of the fee and how it is charged will vary among lenders and may depend on the
length of the lock-in period.
What Options Are Available for Setting
the Mortgage Terms?
Lenders may offer different options in establishing the interest rate and points
that you will be charged, such as:
Locked-In Interest Rate-Locked-In Points.
Under this option, the lender lets you lock in both the interest rate and points quoted to
you. This option may be considered to be a true lock-in because your mortgage terms should
not increase above the interest rate and points that you've agreed upon even if market
Locked-In Interest Rate-Floating Points.
Under this option, the lender lets you lock in the interest rate, while permitting or
requiring the points to rise and fall (float) with changes in market conditions. If market
interest rates drop during the lock-in period, the points may also fall. If they rise, the
points may increase. Even if you float your points, your lender may allow you to lock-in
the points at some time before settlement at whatever level is then current. (For
instance, say you've locked in a 10 1/2 percent interest rate, but not the 3 points that
went with that rate. A month later, the market interest rate remains the same, but the
points the lender charges for that rate have dropped to 2 1/2. With your lender's
agreement, you could then lock in the lower 2 1/2 points.) If you float your points and
market interest rates increase by the time of settlement, the lender may charge a greater
number of points for a loan at the rate you've locked in. In this case, the benefit you
might have had by locking in your rate may be lost because you'll have to pay more in
Floating Interest Rate-Floating Points.
Under this option, the lender lets you lock in the interest rate and the points at some
time after application but before settlement. If you think that rates will remain level or
even go down, you may want to wait on locking in a particular rate and points. If rates go
up, you should expect to be charged the higher rate.
Because practices vary, you may want to ask your
lender whether there are other options available to you.
How Long Are Lock-Ins Valid?
Usually the lender will promise to hold a certain interest rate and number of
points for a given number of days, and to get these terms you must settle on the loan
within that time period. Lock-ins of 30 to 60 days are common. But some lenders may offer
a lock-in for only a short period of time (for example, 7 days after your loan is
approved) while some others might offer longer lock-ins (up to 120 days). Lenders that
charge a lock-in fee may charge a higher fee for the longer lock-in period. Usually, the
longer the period, the greater the fee.
The lock-in period should be long enough to
allow for settlement, and any other contingencies imposed by the lender, before the
lock-in expires. Before deciding on the length of the lock-in to ask for, you should find
out the average time for processing loans in your area and ask your lender to estimate (in
writing, if possible) the time needed to process your loan. You'll also want to take into
account any factors that might delay your settlement. These may include delays that you
can anticipate in providing materials about your financial condition and, in case you are
purchasing a new house, unanticipated construction delays. Finally, ask for a lock-in with
as few contingencies as possible.
What Happens if the Lock-In Period
If you don't settle within the lock-in period, you might lose the interest rate
and the number of points you had locked in. This could happen if there are delays in
processing whether they are caused by you, others involved in the settlement process, or
the lender. For example, your loan approval could be delayed if the lender has to wait for
any documents from you or from others such as employers, appraisers, termite inspectors,
builders, and individuals selling the home. On occasion, lenders are themselves the cause
of processing delays, particularly when loan demand is heavy. This sometimes happens when
interest rates fall suddenly.
If your lock-in expires, most lenders will offer
the loan based on the prevailing interest rate and points. If market conditions have
caused interest rates to rise, most lenders will charge you more for your loan. One reason
why some lenders may be unable to offer the lock-in rate after the period expires is that
they can no longer sell the loan to investors at the lock-in rate. (When lenders lock in
loan terms for borrowers, they often have an agreement with investors to buy these loans
based on the lock-in terms. That agreement may expire around the same time that the
lock-in expires and the lender may be unable to afford to offer the same terms if market
rates have increased.) Lenders who intend to keep the loans they make may have more
flexibility in those cases where settlement is not reached before the lock-in expires.
How Can You Speed Up the Approval of the
While the lender has the greatest role in how fast your loan application is
processed, there are certain things you can do to speed up its approval. Try to find out
what documentation the lender will require from you.
Much of the information required by your lender
can be brought with you when you apply for a loan. This may help to get your application
moving more quickly through the process. When you first meet with your lender, be sure to
bring the following documents:
- The purchase contract for the house (if you don't
have the contract, check with your real estate agent or the seller).
- Your bank account numbers, the address of your
bank branch and your latest bank statement, plus pay stubs, W-2 forms, or other proof of
employment and salary, to help the lender check your finances.
- If you are self-employed, balance sheets, tax
returns for 2-3 previous years, and other information about your business.
- Information about debts, including loan and
credit card account numbers and the names and addresses of your creditors.
- Evidence of your mortgage or rental payments,
such as cancelled checks.
- Certificate of Eligibility from the Veterans
Administration if you want a VA-guaranteed loan. Your lender may be able to help you
Be sure to respond promptly to your lender's
requests for information while your loan is being processed. It is also a good idea to
call the lender and real estate agent from time to time. By calling occasionally, you can
check on the status of your application, and offer to help contact others such as
employers who may need to provide documents and other information for your loan. It is
also helpful to keep notes on your contacts with the lender so that you will have a record
of your conversations.
Ask About Lock-Ins
When you're ready to settle on your loan, you'll want to get the loan terms that you've
locked in. To increase that likelihood, it is important to learn as much as you can about
what the lender is promising you before you apply for a loan. Ask for the following
information when you shop for a loan:
Lock-Ins and Fees
- Does the lender offer a lock-in of the interest
rate and points?
- When will the lender let you lock in the interest
rate and points? When you apply? When the loan is approved?
- Will the lock-in be in writing? If the lock-in is
not in writing, you will have no record of the lender's agreement with you in case of a
- Does the lender charge a fee to lock in your
interest rate? Does the fee increase for longer lock-in periods? If so, how much?
- If you have locked in a rate, and the lender's
rate drops, can you lock in at the lower rate? Does the lender charge you an additional
fee to lock in the lower rate?
- Can you float your interest rate and points for
now, and lock them in later?
Loan Processing Time
- How long does the lender expect to take to
process your loan?
- What has been the lender's average time for
processing loans recently?
- Has the lender's loan volume increased? Heavy
volume might increase the lender's average processing time.
Expiration of Lock-Ins
- What rate will be charged if the lock-in expires
before settlement-the rate in effect when the lock-in expires?
- If you don't settle within the lock-in period,
will the lender refund some or all of your application or lock-in fees if you decide to
cancel the loan application?
- If your lock-in expires and you want to get
another lock-in at the rate in effect at the time of the expiration, will the lender
charge an additional fee for the second lock-in?
Complaints About Lock-Ins
Knowing what to look for puts you in a better position to decide whether, when, and how
long to lock in mortgage terms. Also, by helping to keep the loan process moving, you can
lessen the chance that your lock-in will run out before settlement.
But what if your lock-in does lapse? If you
believe that the lapse was due to delays caused by the lender or someone else involved in
the loan process, you should try first to reach a mutually satisfactory agreement with the
lender. If that effort fails, consider writing to the appropriate state or federal
Some lender actions, such as offering lock-in
terms which are impossible to fulfill, failing to process your loan diligently, or causing
your lock-in to expire are improper--and may even be illegal. In addition, because you may
have contractual rights under your lock-in or loan commitment, you may want to consult
with an attorney. Be aware, though, that complaints may not be resolved as quickly as may
be necessary for a home purchase.
Depending upon their authority under applicable
state or federal law, regulatory agencies may either attempt to help you resolve your
complaint directly or record your complaint and recommend other action.
State consumer protection offices, banking
authorities, and offices of the attorney general can be contacted regarding complaints
against many lenders doing business in the state. (Some states have enacted legislation to
specifically address complaints about mortgage lock-ins.)
In addition, some lenders are directly
supervised by federal regulatory agencies, as shown in the list that follows:
Division of Credit Practices Bureau of Consumer Protection Federal Trade Commission
601 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Federally Insured Savings and Loan
Institutions and Federally Chartered Savings Banks
Office of Thrift Supervision
1700 G Street, N.W.
Washington, D.C. 20552
State Member Banks of the Federal
Division of Consumer and Community Affairs Board of Governors of the Federal Reserve
20th and Constitution Avenue, N.W.
Washington, D.C. 20551
Compliance Management Division Office of the Comptroller of the Currency
250 E Street, S.W.
Washington, D.C. 20219
Federally Insured Non-Member
State-Chartered Banks and Savings Banks
Office of Consumer Programs Federal Deposit Insurance Corporation
550 Seventeenth Street, N.W.
Washington, D.C. 20429
(800) 424-5488 or (202) 898-3536
Federal Credit Unions
National Credit Union Administration
1776 G Street, N.W.
Washington, D.C. 20456
The information contained in this brochure is
intended to help you ask the right questions when shopping for a loan. It is not a
replacement for professional advice. Talk with mortgage lenders, real estate agents,
attorneys, and other advisors, about lending practices, mortgage instruments, and your own
interests before you commit to any specific loan.