What Is a Loan Lock?

Malcolm Tatum

A loan lock is a type of mortgage tool that makes it possible to set or lock in a particular mortgage rate for a period of time. This type of locking arrangement may be utilized during the negotiation period in which a loan application is being considered, as well as at certain intervals during the life of an approved loan. In either scenario, the idea is to allow the borrower to secure or lock in a rate that is agreeable and make it easier to project the total amount that he or she will ultimately repay in return for the loan.

Man climbing a rope
Man climbing a rope

As it relates to the pre-approval period, a loan lock is a device that ensures that whatever rates are in effect at the time the borrower submits a mortgage loan application will be honored when and if the loan is finally approved. Since the application process can easily take as long as three consecutive calendar months, the potential for average interest rates to shift during this period are very good. With the loan lock, the borrower can look forward to receiving the best possible rate, even if the average interest rate has changed in the interim.

In many nations, a loan lock clause is also included in many types of mortgage contracts. One of the more common strategies is the use of this feature with convertible rate mortgages. Many of these types of mortgage loans carry a fixed rate of interest for the first several years, then offer the borrower the option of either converting to a floating or variable rate of interest for the remaining life of the debt, or lock in a fixed rate that is based either on the rate used up to that point, or one based on the current average lending rate. If the borrower believes that locking in a fixed rate for the rest of the loan’s life will help to lower the total cost of the loan up to the point of settlement exercising this option to secure that fixed rate is often a good idea.

While a loan lock is often provided with many types of mortgages, care should be taken to make sure the option is included in the terms and conditions, and that the borrower understands what circumstances must prevail in order for the lock to take place. In terms of benefits, a loan lock can be a good decision if there is a good chance that interest rates will increase in the future. At the same time, if there are indications that rates will remain static or even decrease over the life of the mortgage loan, going with a variable or floating mortgage interest rate may be a better idea.

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