The Key to the Loan Lock and the Interest Rate

What is a loan "lock"? And more importantly, as a home buyer, why should you care?

The answer to the first question is relatively simple. Since mortgage rates can change from week to week, day to day, and sometimes during the day, a loan lock guarantees home buyers a specific interest rate on their mortgage. This lock preserves the interest rate from the time the loan is approved or pre-approved until the actual closing occurs.

Its importance to borrowers is great. With interest rates generally rising, even a modest one quarter of one percent rise in interest rates can cost borrowers hundreds, even thousands, of dollars each year. That may be a relatively small amount when compared with the total amount borrowed, but to the borrowers, paying that additional money can make budgeting tougher.

For example, a $600,000 loan for 15 years at 6.00 per cent will have a monthly mortgage payment of about $5,063. That same loan, with an interest rate of 6.25 per cent, would have a mortgage payment of about $5,144. At 6.5 per cent, that same mortgage payment would reach $5,226.

Shelley Puentes, a mortgage broker with Diablo Funding Group, says it is important to be sure the loan is locked and not just assume it is. "There was a time, about a year ago, when some mortgage brokers were saying they locked the loan and they didn't. They were playing the market, because interest rates were going down."

Puentes doesn't like that approach for several reasons. "First, I don't gamble," she explains. "And the other reason I don't do that is, simply, people don't like that, and I work with a lot of referrals."

Puentes also points out that mortgage brokers often earn their money by selling loan products at a profit. A mortgage broker may earn a commission paid by either the lender or the borrower, or charge a fee to either party, or do some of both.
That means a fluctuation in interest rates can hurt a broker's compensation. But Puentes says accepting the short-term reduction in commissions or fees is far preferable to surprising a borrower with a higher-than-expected interest rate. "Even if I lose money, I'm not going to go back on my guarantee," she explains.