Real Estate

Lock In Period for a Home Loan

Story Published on October 10, 2009 ⋅  Email this Story ⋅  Print this Story ⋅ Post a comment ⋅

When you make an application for a home loan, the rate you are quoted will be the rate for that day. Unless you also close on that day, which is unlikely, you will have a risk on the interest rate being higher when you eventually close.

Because of this worry by borrowers, most lenders now offer a lock in period, which means you can maintain the quote you are given, for a while, anyway. It is only normal to realize that there will be a delay between when the loan is applied for and the home is closed on. The rate of interest is a critical factor in the affordability of a home, so this can be an important point. The lock in period is the period during which the potential borrower can obtain a rate for a future closing. Lenders offer lock in periods for both rates and points.

You may be able to lock in the interest rate and points either as you apply for the loan, during the loan processing or when the mortgage is approved.

Let us say you are quoted a 30 day lock in rate of 5.5% with one point. You then have the right to borrow at 5.5% even if you are not able to close on the loan for the next thirty days. This is a fairly common lock in time that banks offer to attract customers. Longer periods are also available, but usually are priced more, since lenders are not willing to risk rates increasing for a longer period without some compensation for the risk.

One of the problems of a lock in rate, however, is that if rates in general decrease, you may be stuck with the increased rate, unless there is an opt out clause. Make sure your bank is willing to switch to the reduced rate in case of decreased interest rates.

Once the 30 day period is over, your agreement expires and you will be given whatever the new market rate is. If rates have not changed, a lender might consider issuing a new guarantee at the same rate.

There can also be a combination of lock ins:

Locked in Interest Rate with Locked in Points. The lender fixes both the interest rate and the number of points for a set period.

Rate is locked, points are not. The base rate stays the same, but the points may vary. You may have to pay additional points to obtain the guaranteed rate.

When interest rates are rising quickly and drastically, opting for a lock in period is a smart move, and may even be worth paying for.

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