Definition§
A Rate Lock, also known as a Locked-In Interest Rate, is an agreement between a borrower and a lender that secures an interest rate on a mortgage for a specified period. This mechanism provides the borrower with protection against rising interest rates during the mortgage approval and home purchase process. Generally, rate locks are available for periods varying from a few days to several months, depending on the lender and borrower needs.
Key Points:§
- Secures a specified interest rate for a mortgage.
- Effective for a pre-determined period.
- Protects against fluctuations in interest rates during the loan approval and closing process.
Examples§
- Home Purchase: A homebuyer applies for a mortgage and locks in an interest rate for 60 days to ensure the rate does not increase before closing on their new home.
- Refinancing: A homeowner refinances their existing mortgage and locks the new interest rate for 45 days while the refinancing process is completed.
Frequently Asked Questions (FAQs)§
What happens if I don’t close the loan within the rate lock period?§
If the loan doesn’t close within the rate lock period, the borrower may be subject to a higher interest rate unless the lock is extended, often resulting in additional fees.
Can I extend a rate lock?§
Yes, rate lock extensions are sometimes available, but they typically come with additional costs imposed by the lender.
Does a rate lock apply to all mortgage types?§
Rate locks apply to most conventional fixed or adjustable-rate mortgages but may vary across different loan products and lenders.
Do all lenders offer rate locks?§
Most lenders offer rate locks, but the terms, conditions, and duration of the lock can vary.
Are there any fees associated with a rate lock?§
Some lenders may charge a fee for locking in the interest rate, especially for longer lock periods or extensions.
Related Terms§
- Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that periodically adjusts based on a specific benchmark interest rate index.
- Fixed-Rate Mortgage (FRM): A mortgage with an interest rate that remains the same for the entire term of the loan.
- Loan-to-Value Ratio (LTV): A financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
- Mortgage Pre-Approval: An evaluation by a lender that determines whether the borrower qualifies for a loan and the maximum amount they are eligible to borrow.
Online Resources§
References§
- “Mortgage Rate Lock: 5 Things to Know.” The Mortgage Reports, Mar. 1, 2021.
- Irwin, Neil. “The Short Term Real Rate Lock Problem: Getting a Handle on Interest Rate Volatility.” The Upshot, The New York Times, Mar. 28, 2017.
Suggested Books for Further Studies§
- Glink, Ilyce R. 100 Questions Every First-Time Home Buyer Should Ask. Three Rivers Press.
- Pennington, Mark A. The Complete Guide to Real Estate Finance for Investment Properties. John Wiley & Sons.
