What is a Mortgage Rate Lock?
The mortgage rate lock is an option that can occur between a bank or mortgage lender and the borrower of the mortgage loan. When the borrower is approved for a mortgage, the lender may offer the option to lock the interest rate on the mortgage loan, which prevents it from increasing for the period of time between the approval for the loan and the actual issuance of the loan. For example, if a borrower is approved for a mortgage at five percent interest, and it then takes 30 days to close on the sale of the home, a mortgage rate lock will guarantee that the borrower still receives that five percent interest rate, even if rates will have increased over those 30 days.
Not all lenders offer the mortgage rate lock option, and laws vary between states, so it is the responsibility of the borrower to research this ahead of time. The mortgage rate lock is really a good-faith option between both the borrower and the lender. The lender is agreeing not to delay the closing beyond the term of the lock, and the borrower is agreeing not to walk away from the sale or go with a different lender. The lender may charge a fee if the borrower does walk away from his or her commitment.
A mortgage rate lock may include a "float-down" option; the better ones usually do. This option allows the borrower to get a lower interest rate on the mortgage should interest rates drop over the duration of the lock, but it still prevents the interest rate from increasing. The mortgage rate lock will generally be effective for a predetermined period of time, which is typically between 30 and 60 days. This is because it can take some time to close on the sale of a home, or even to just refinance a home loan.
Some lenders will add points to the loan if the lock is held for any longer, and some might charge higher interest rates on the loans in the first place, so it is still a good idea to shop around for lenders. If one chooses to forgo the option of locking the rate, it is virtually guaranteed that the interest rate will change in the period between submitting the loan application and closing on the loan. It may go down, but it is equally likely to increase; this is why it is best to explore all options ahead of time.
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