Definition
A “Rate Guarantee” or “Locked-In Interest Rate” is a financial agreement between a borrower and a lender that ensures the interest rate on a mortgage loan remains fixed for a predetermined period. This agreement provides stability and predictability for borrowers by protecting them from rising interest rates during the lock-in period.
Examples
- Home Purchase: A borrower looking to buy a home gets pre-approved for a mortgage with a rate guarantee of 3.5% for 60 days. Even if market interest rates rise to 4.0% within those 60 days, the borrower will still benefit from the 3.5% rate as long as the loan closes within the lock-in period.
- Refinancing: A homeowner wants to refinance their existing mortgage. They lock in an interest rate of 2.75% for 45 days. If the interest rate increases during those 45 days, the homeowner will still refinance at the 2.75% rate.
- New Construction: Buyers of a newly constructed home might secure a rate guarantee of 4.0% for 90 days to hedge against potential interest rate hikes while their house is being built.
Frequently Asked Questions (FAQs)
Q: How long does a rate guarantee last? A: The duration of a rate guarantee varies and can range from as short as 15 days to as long as 120 days or more, depending on the lender and the type of loan.
Q: Does a rate guarantee cost extra? A: Some lenders may charge an upfront fee to lock in an interest rate, while others may include the cost within the interest rate or loan terms.
Q: Can the interest rate ever decrease during the lock-in period? A: Typically, a rate guarantee only protects against rising interest rates. Some lenders offer a “float down” option, which allows the borrower to benefit from a lower rate if market rates drop during the lock-in period, often for an additional fee.
Q: What happens if the loan doesn’t close within the lock-in period? A: If the loan does not close within the rate guarantee period, borrowers might face higher rates or may be able to extend the guarantee for an additional fee, depending on the lender’s policies.
Q: Are rate guarantees applicable to both fixed-rate and adjustable-rate mortgages (ARMs)? A: Rate guarantees are most commonly associated with fixed-rate mortgages, but they can also be used for adjustable-rate mortgages, particularly for guaranteeing the initial period’s rate.
Related Terms
- Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant throughout the loan term.
- Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that can change at specified times after an initial fixed period.
- Rate Lock: The guarantee of an interest rate, similar to a rate guarantee, for a predetermined period.
- APR (Annual Percentage Rate): The annual rate charged for borrowing expressed as a yearly percentage, which includes interest and other fees.
Online Resources
- Investopedia: Lock-In Rate Definition
- Consumer Financial Protection Bureau: Interest Rate - What Do Rate Locks Cost?
- NerdWallet: Mortgage Rate Lock: How It Works
References
- Investopedia, “Rate Lock Definition.” Retrieved from Investopedia.
Suggested Books for Further Studies
- “Mortgage Ripoffs and Money Savers: An Industry Insider Explains How to Save Thousands on Your Mortgage or Re-Finance” by Carolyn Warren
- “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls, Second Edition” by Jack Guttentag
- “Home Buying Kit For Dummies” by Eric Tyson and Ray Brown
