Essentially a rate lock/lock-in is a commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time.
Here is how rate locks work; Although lenders can differ in how they handle their own rate lock basics, a typical locking in of a rate involves a lender agreeing to hold a specific mortgage rate for a guaranteed amount of time. Rates are locked in from 15 days up to 180 days. Depending upon the rate lock period, the actual mortgage rate may vary; the longer your rate lock period, the higher the rate can be. Most lenders will collect a rate lock fee or deposit as a way to secure your rate/business. It is not an additional fee as it is credited back to you at closing. By locking in your interest rate, you have secured the rate no matter what goes on in the market. It will not go lower or higher during the processing of your loan.
|Lenders may offer different options in establishing the interest rate and points that you will be charged, such as:|
|Locked-In Interest Rate–Locked-In Points. Under this option, the lender lets you lock in both the interest rate and points quoted to you. This option may be considered to be a true lock-in because your mortgage terms should not increase above the interest rate and points that you’ve agreed upon even if market conditions change.|
|Locked-In Interest Rate–Floating Points. Under this option, the lender lets you lock in the interest rate, while permitting or requiring the points to rise and fall (float) with 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 instance, say you’ve locked in a 10½ 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 2½. With your lender’s agreement, you could then lock in the lower 2½ points.) If you float your points and 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’ve locked in. In this case, the benefit you might have had by locking in your rate may be lost because you’ll have to pay more in up-front costs.|
|Floating Interest Rate–Floating Points. Under 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.|
For more information about rate locks/lock-ins, please read this article written by the Federal Reserve Board. A Consumer’s Guide to Mortgage Lock-Ins
Please contact me for information about rate locks or refinancing.