When you apply for a mortgage, you will be quoted a rate, but that rate is for that day only. Unless you also close on that day, which is unlikely, you will have a risk on the interest rate being higher when you do close.
Because of this worry by borrowers, most lenders now offer a lock in terms, which means you can keep the quote you are given, for a while, anyway. It is only practical to realize that there will be a delay between when the loan is applied for and the home is closed on. And since most people figure how much mortgage they can pay for based the interest rate, they realize people want to maintain that rate. Locking in a rate for a length of time frequently proves to be a good idea for a borrower. Banks offer lock in periods for both rates or points.
As a rule, banks will offer this option at any point: application, during processing, or at approval.
Perhaps you have a chance to lock in 5.5% interest with one point for 30 days. This means that even if rates go upincreased, if the borrower closed within that time frame, the rate would stay 5.5 %. This is a normal lock in period, and a lot of lenders offer it to attract borrowers, and are willing to take the risk for a short period of time. Longer than that period, however, and the bank will require a payment to fix the rate since they will seek to be compensated for the additional risk.
This can go both ways, because if rates decrease, you may want to cancel the loan, but the agreement must allow for it. You have be sure to negotiate such a benefit in advance.
If your loan is not settled during the lock in period, it will expire and your new loan or new lock in period will be at the higher rate. If there haven’t been any significant movements in rates, the bank may be willing to renew.
There are mixtures in terms of lock in periods.
Rate is locked, points are locked. In other words, the lender will maintain both the interest rate and number of points for 30 days.
Locked in Rate, floating points. The basic rate is fixed for the period, but the lender retains the right to change the points. In order to keep the original rate, you may have to pay extra points.
When interest rates are moving up quickly and drastically, choosing for a lock in period is a wise move, and may even be worth paying for.
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