Because the applicant does not have a completed loan application submitted to the individual mortgage company. Mortgage rates can change daily and when economic news is somewhat volatile, rates can even change during the course of a business day. This doesn’t happen very often but it’s certainly possible. One might call a mortgage company in the morning and get a rate quote when a little later some economic report is released showing an economy more robust than expected. Mortgage lenders might then issue an intra-day price change.
Mortgage rates can then “float” during the day and from day to day. The only way to get a rate locked down is with a rate lock. Different mortgage companies can have different rate lock procedures, but most all require a loan application to be submitted and on file. Not only a loan that is submitted, but one that is documented including a credit report and bank statements. A lock might also require the loan be approved. There will be variances from one lender to the next, but these are all common requirements.
Lenders take rate locks just as seriously as you do. When you lock in a rate, the lender essentially pulls your loan amount from their line of credit. Lenders can provide you with a copy of how and when you can lock. Rate locks can be extended for a specific period of time, say for as little as five or ten days and up to six months for certain programs. If rates go up, the borrower as well as the lender is protected. If rates go down, well, there’s little either can do. That is, unless there is a “float down” associated with the loan.
A float down means should the interest rate on a locked loan actually fall, there’s the option of obtaining the new, lower rate. So what good is a lock if the lender can offer the new lower rate should rates fall? A lender can offer a float down if rates fall by a certain amount. A float down option might require market rates be at least 0.25% lower than the locked rate under the same term. This option isn’t free. There will be a fee for the float down option and don’t expect the absolute rock bottom rate.
Sure, one can always switch loan companies and get a lower rate, but this is a time-consuming and expensive proposition. Changing mortgage companies’ midstream means getting a host of documents reordered. This takes time. So much time that it’s possible the escrow period and sales contract has expired. And, float downs aren’t always an automatic.
Lenders do realize that when rates do fall quite a bit, more than the 0.25% margin, they take the risk of not allowing a borrower to take a lower rate. Not the absolute lowest rate, but with a float down the rate can be a little bit closer to market.
