Closing time is of the utmost importance on a locked refinance loan. A rate lock is not only a commitment of a certain interest rate and price, but of a time period. If the lender does not close and fund the loan before the end of the lock period, the rate lock either expires or needs to be extended for a fee. If the extension goes more than a week or two, it typically becomes very expensive.
Longer Lock Terms Cost More
The shorter the lock term, the cheaper the fee for that rate. A 30-day rate lock will cost less than a 60-day rate lock. The difference is usually an eighth to a quarter percent of the loan amount in fees for the same interest rate. It would therefore seem advantageous to always take a shorter lock term. But the fee for extending a lock 30 days past the original expiration is typically around a half percent of the loan amount. So if you know it will be difficult to close a refinance quickly, it might be best to start with a 60-day rate lock.
Lender Capacity Affects Length
Lenders will typically enforce a minimum lock term on refinance loans. They determine this based on their processing and underwriting turnaround times. If they know that they lack the capacity to close an average refinance loan in under 30 days, they will not allow refinances to be locked for that time frame. Their minimum lock term may be 45 or 60 days. Circumstances may still arise that force a rate lock extension, but the borrower will have more leverage to force the lender to absorb the cost.
To Lock or to Float
Some lenders tend to lock rates at the time of a loan application. Others prefer to leave the rate unlocked, to let it “float” and lock it in closer to closing. Ultimately, this is the borrower’s choice. If you are uncomfortable with locking for such a long period of time, tell your lender you want to let your rate float. Reasons for this would include expectations that rates might go down, or at least be cheaper at a shorter lock term. Another reason would be if you expect your refinance to take longer than usual and don’t want to run the risk of needing a rate lock extension.
What if the Rate Lock Expires
If you have locked in your rate and the market improves, or if rates stay the same but your loan cannot close in time to meet the lock date, it might seem to make sense to simply let the lock expire. But a lender is unable to lock a new loan on the same property without paying a steep penalty to the loan investor, which is then passed on to the borrower. In order to lock a new loan at the current market, one would have to wait from 30 to 60 days depending on the lender and the investor. Time is of the essence any time a mortgage loan is locked. While an early rate lock gives security for the terms of a refinance, it also starts a clock ticking toward closing.
With more than a decade of experience, Gregory Erich Phillips is a trusted expert on real estate and mortgage financing. As an author, Phillips is known for his writings on economics, personal finance, religion, politics and culture.