What's the difference between locking a rate and hedging strategies lenders use? How does that show up in pricing?

How do rate locks and lender hedging affect pricing?

You want to understand how rate locks work versus the hedging strategies lenders use behind the scenes, and how both affect what you pay. A rate lock guarantees your interest rate for a specific period while your loan processes. Lenders use hedging strategies—like selling loans to investors or buying financial instruments—to manage the risk of rate changes between when they quote you a rate and when your loan closes. When you lock a rate, the lender typically hedges that specific loan to protect against losses if rates rise before closing. The cost of hedging gets built into the rates lenders offer. If hedging becomes more expensive due to market volatility, lenders commonly adjust their rate sheets to maintain profit margins.

You can compare rate quotes and ask lenders about their lock periods—longer locks often cost more because they require more expensive hedging. Some lenders also offer float-down options that let you capture lower rates if they drop during your lock period, though this typically comes with additional fees. Share your timeline and rate concerns with potential lenders, and they can walk you through their specific lock options and pricing structure.