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Mortgage Interest Rate Lock-Ins

 

Description

A mortgage rate lock, also called a mortgage lock-in or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. The purpose of a mortgage rate lock is to ensure that the interest rate, points and certain other fees that you are quoted today remain the same at your settlement. Depending upon the lender, you may be able to lock in these terms when you file your application, during processing of the loan, when the loan is approved, or later.

Rate Lock Benefits

A rate lock that is given when you apply for a mortgage loan may be useful because it is likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This protection could affect whether you can afford the mortgage. However, a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a lower rate that becomes available during this period.

A Rate Lock is not the same as a Loan Commitment

It is important to recognize that a rate lock is not the same as a loan commitment, although some loan commitments may contain a rate lock. A loan commitment is the lender's promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender's commitment only after your loan application has been approved. This commitment usually will state the loan terms that have been approved (including loan amount), how long the commitment is valid, and the lender's conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender.

Rate Lock Fees

Some lenders charge an up-front fee for locking in your interest rate and points, which might not be refunded if you withdraw your application, if your credit is denied, or if you do not close the loan. Other lenders may charge a fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction of a percentage point added to the rate you lock in. The amount of the fee and how it is charged will vary among lenders and may depend on the length of the rate lock period. Generally, longer rate lock periods require higher fees.

Rate Lock Options

Lenders may offer different options for locking-in the interest rate and points that you will be charged, such as:
 

  1. Locked-In Interest Rate, Locked-In Points
    With this option, the lender lets you lock in both the interest rate and points quoted to you. Your mortgage terms should not increase above the interest rate and points that you have agreed upon even if market conditions change.
  2. Locked-In Interest Rate, Floating Points
    With this option, you lock in the interest rate, while the points may rise or fall (float) depending on changes in market conditions. If market interest rates drop during the lock-in period, the points may also fall. If they rise, the points may increase. Even if you float your points, your lender may allow you to lock-in the points at some time before settlement at whatever level is then current. For example, say you have locked in a 10.5 percent interest rate, but not the 3 points that went with that rate. A month later, the market interest rate remains the same, but the points the lender charges for that rate have dropped to 2.5. With your lender's agreement, you could then lock in the lower 2.5 points. On the other hand, if you float your points but market interest rates increase by the time of settlement, the lender may charge a greater number of points for a loan at the rate you have locked in. In this case, the benefit you might have had by locking in your rate may be lost because you will have to pay more in up-front costs.
  3. Floating Interest Rate, Floating Points
    With this option, the lender lets you lock in the interest rate and the points at some time after application but before settlement. If you think that rates will remain level or even go down, you may want to wait on locking in a particular rate and points. If rates go up, you should expect to be charged the higher rate.

  Because practices vary, you may want to ask your lender whether there are other options available to you.

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