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When you lock a rate, you are buying insurance. The lender is making a commitment to the purchaser of the loan that it will deliver a loan at a certain price. The lender has in a sense purchased security for you. You now know that uncertainty is no longer part of the process. It costs the lender money to get out of a commitment and it rarely is passed on to the consumer. A minor drop such as 1/8 on the rate will not result in a big drop in the payment. If it is a major drop, say ½ of one percent in the note rate, it can make a big difference.
The most common end result is the consumer finding another lender to get a lower rate. But fees may be higher. A new appraisal may be required and the corresponding drop in rate may be offset in higher costs at the closing table. On a refinance, a consumer may use the right to cancel, but may not be able to return to the same lender for a preferred rate. One other thing to consider is the change in underwriting requirements. You may be trading in an approval under one set of guidelines for a denial under a new set of guidelines.
When you lock in your rate you are protecting yourself from a rate increase that could not only make your paymen(s) higher but could even change underwriting decisions. So locking your rate benefits you and everyone else involved in the transaction (Seller etc.) because your file will be processed and go through underwriting.
Most lenders get preferred rates which they pass on to you, by limiting what is called lock fall-out.
When a lender or broker locks a loan it goes down as a commitment to lend on the books, and in order to break that commitment their is usuallt a fee assessed and there is usually a requirement that the rates need to have dropped a certain amount for borrowers to be eligible.
Lets say you did not lock your loan but had floated instead. Your file goes through processing and you think the rates will drop further and all of a sudden the rates shoot up higher than when you applied for your loan, and now you only qualify for a loan that is 30,000 less than the agreed upon purchase price! And you are past your finance contingency! You could buy the rate back down for a huge fee, or tell them you cannot buy and sacrifice your earnest money. Not a very fun place to be.
Lets take it down a notch and say that your file was pre approved and you floated the rate. The rates change, now you have to be approved again, and again everytime the rate changes your lender needs an automated underwriting response using the same rate as the note rate. So by floating you create a moving target.
The lenders basic position then, for your benefit is to require a lock before final underwriting – for everyones benefit- because an unlocked loan cannot fund. The only exception being a truly remarkable decrease in rate, a t the right time in the process, with a fee of about .500% or $500 per 100K.
You wouldn’t want the lender to renegotiate when the rates go up would you?
If my rate has been locked but the house is not yet closed, and the mortgage rate is less than before (when it was locked), can the lender change the rates accordingly or does it need to be refinanced once we've bought the house?