What Is a Loan Lock?
Let me explain what a loan lock is: it's an agreement where a lender promises you, the borrower, a specific interest rate on your mortgage and holds that rate for a set period. This setup protects you from any interest rate hikes during that time. Keep in mind, though, that lenders might charge you a fee for this lock or bump up the interest rate with an extra margin.
Key Takeaways
You need to understand that a loan lock is simply an agreement to secure an interest rate and keep it steady for the agreed time. It ensures that when your loan closes, the lender provides it at that specified rate. Since rates can fluctuate up or down before closing, this lock shields you from any increases during the period.
How a Loan Lock Works
Here's how it operates: the lock guarantees you'll get the loan at the specified rate upon closing. Lenders usually quote rates based on current market conditions at the time of the offer, not at settlement, and they include their margin in that quote.
Rates might rise or fall before you close, so the lock acts as your safeguard against increases. Sometimes, a lender offers the lock at a rate plus points, which are fees you pay upfront to lower the rate over the loan's life.
If rates drop during the lock, you might be able to back out, but check your agreement first—this is called fallout risk for the lender. In cases where rates decline, you could opt for a float-down provision to grab the lower rate, but expect to pay extra for that feature since it increases the lender's risk.
Loan locks usually run for 30 or 60 days, at least long enough to process your application. They can be as short as a few days after approval. You can negotiate terms and extend the lock, often for a fee or a slight rate increase.
Important Considerations
Remember, a loan lock guards you against rising rates, but the drawback is the cost if you need to extend it.
Loan Lock vs. Loan Commitment
Don't confuse a loan lock with a loan commitment. A commitment is the lender's promise to lend a certain amount at some future point, which might or might not include a rate lock. In mortgages, it's often used to strengthen your offer to a seller in a competitive market.
Is It Better to Lock in a Mortgage Rate or Wait?
If you're under contract to buy a home, locking in the rate makes sense because rates can rise, increasing your monthly payments.
What Are the Disadvantages of a Loan Lock?
The main downside is missing out if rates fall, but you can add a float-down provision for a fee to capture a lower rate if that happens.
How Long Can a Lender Lock In a Rate?
Lenders typically lock rates for 30, 45, or 60 days.
The Bottom Line
In summary, a loan rate lock is your agreement with the lender to secure an interest rate until closing. It protects you from fluctuations that could raise your payments, but you'll pay for it through fees or added margins.
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