When you’re approved for a mortgage your lender agrees to hold your interest rate for a set period of time.
Rate holds are usually either: 120-days, 90-days, 60-days, 45-days, or 30-days.
When you have a long rate hold, much can change before you close. Odds are, rates on your closing date will be different from the rate you received when applying.
If rates go up, you’re laughing because your rate hold protects you.
If rates drop, you’ll want to make sure your bank or broker is watching out for you and secures you the lowest rate possible.
Different lenders have different policies on rate adjustments. Here are a few examples:
Rate Fixed Before Closing: Some lenders will adjust your rate lower (if applicable) at a set number of days before closing–like 5 or 7 days. This means you have to wait until that date to make any adjustments. If rates drop and then go back up before this date, you don’t benefit from those previously lower rates.
Broker-Instructed Rate Locks: Some lenders give brokers a chance to re-lock their client’s rates at any time between approval and closing. The broker usually gets one shot in this case, so timing is everything.
Rate Lookbacks: Hindsight is 20/20, and this is one of the few cases where you benefit financially from it. Rate lookbacks are the best of all rate drop policies because they require no timing. The lender simply offers you the lowest rate they’ve had between your approval and closing dates. ING and MCAP are two examples of lenders offering this policy.
Other things being equal, choosing a lender that offers rate lookbacks will save you money over the long-run, especially if you have a 90 or 120-day rate hold.
Remember as well that some lenders require broker intervention to arrange for a rate drop. Other lenders simply drop your rate automatically at their specified rate adjustment date. Always ask your mortgage planner how the lender you’ve chosen works in this respect.
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