What Does It Mean to "Lock the Rate" or "Rate Lock"?

Yesterday I had a customer who is an engineer at one of the largest cable companies in the world tell me he was feeling pressured from me to get his mortgage loan origination agreement so I could lock his rate. Just as I read his email a man was in my office to pick up my son's XBox360 and that man is a career firefighter. He overheard part of the conversation and looked at me questioningly. I said, "every job has details other people have no idea about. People have no idea what you do when you are not fighting a fire and only think they know what you do while you are fighting a fire."

The moving parts of your job are a mystery to me unless you are in my industry. For example I really have no idea what the producer of a news show does. Oh, I (like some of you), may think I know what one does but all we can picture are just imaginary glimpses of what a news show producer may do. Part of the challenge is that most of us believe we know everything we need to know about other people's jobs to critic them or make demands of them which are up to unreasonable. This article aims to help the layman and real estate agent understand the importance, urgency and risk involved in locking an interest rate.

Rate sheets can be quite complex. For loan officers who work for a servicing lender there usually is only one rate sheet with which to become familiar. Even that one sheet has changes often multiple times per day. For smaller lenders, like my Novation Mortgage, we depend on the investors (lenders) we sell to for providing our rate sheets. Since we sell to multiple investors we monitor multiple rate sheets. Part of our job is to advise our applicants on which rates are available, what type of loan they are associated with and when those rates are at best value and may change.

I will admit the average loan officer has no clue what affects rates nor when they may be in danger of moving. Generally the order takers at the bigger lenders don't even care whether rates are about to go up or down - they just read what's on the screen. That makes it even more important for the borrower to have a good understanding of what affects rates and what it means to lock a rate. It also makes good sense to work with a loan officer who works for a small broker or small lender because they are usually much more involved in rate changes and what affects them.

The definition, pure and simple, of locking the rate is to reserve the amount of funds for the loan at the specified interest rate. While that sounds simple it's actually quite complex, carries a cost to the lender and presents a fair deal of work to the secondary marketing department. Hello - who are these new people? Secondary marketing department? That's a whole new department where you may find a real loss mitigator working next to the lock desk, the post closing auditor and the secondary marketer. It's where your actual rate is determined.

What actually happens is the amount of the loan (the amount the customer is borrowing) is taken out of the warehouse line or funding pool. It is, in essence, borrowed from the investment pool until the loan closes. So if you were the lender and your friend wanted to borrow $100,000 from you you would go to the bank and borrow that money at interest rate (A) and lend it to your friend at interest rate (B) - that's called the spread. Now, if you borrow that money at 4.5% on April 10th and your friend needs it on April 30th you are actually paying the interest on that loan until your friend actually borrows the money on the 30th.

Why did you not wait until the 30th to borrow the money to loan to your friend? You could have - but you knew that the interest rate was 4.5% on the 10th - you also knew, or had reason to believe, the rate would go up before the 30th. You locked the loan on the 10th to get your friend the best rate.

What if your friend changed their mind after you locked the rate (borrowed the money to fund their loan)? You would still have done all the paperwork to take that money off your line and you would still pay the interest for the time you had the money off your line. So does the lender. Loans that don't close can cost the lender hundreds or thousands of dollars just like it would you as an individual.

I hope this helps you understand the seriousness of locking a loan rate and what it means to the lender - whether they are small or large - can you imagine what losing a loan after locking the rate means to small lenders? Just another reason we don't like to commit to early and why we take it a little personal when borrowers change their mind after we have locked the rate. Yes, it's a part of doing business but every loan that withdraws or falls out after locking just adds to the overall cost of doing loans for people who are serious about borrowing.

By the way - I locked the guy's rate at a very low number. I have seen this before ... he will goof around trying to beat my very low pricing. By the time he calls me back he won't be able to get that rate anymore because it will have expired. If you're not dealing with a true mortgage professional from your local market area you are very likely making a mistake. Don't make the mistake of automatically jumping for the loan officer who calls you or sends you an email without checking with a true local professional.

Novation Mortgage is in Metropolitan Atlanta Georgia and we provide FHA, VA and conventional (Fannie Mae and Freddie Mac) funding for our neighbors since 2001. Call me directly at 678-946-0101