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- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Mortgage Loan Lock
As we all know that in the mortgage industry the interest rates change quite often.
When you are looking to refinance your current mortgage or buy a new home with a mortgage the lender or the bank will charge you an interest rate for the loan that they provide.
In a market where the interest rate is rising, you must lock your loan with the lender before you lose on a good interest rate. In this post, we will learn what is a loan lock and how it works.
What Is A Loan Lock?
A loan lock, also known as a mortgage rate lock is a tool that allows borrowers to “lock” an interest rate for a mortgage for a set period usually 15 to 60 days.
If the loan does not close within the lock-in period, the borrower may extend the period by paying an additional fee.
Let’s say you lock the interest rate at 5% for 15 days and after 10 days the interest rate increases to 5.5%.
You will still qualify for 5% interest, which will keep your loan lower over the long term. Thus, the rate lock protects the borrower from rising mortgage interest rates.
How Does The Loan Lock Work?
Locking in the loan assures the borrower that the lender will provide a loan at a specified interest rate at the time of closing. In most cases, lenders provide loan estimates that show the interest rate at the time of application rather than at the time of closing.
The listed interest rate also includes the lender’s profit margin. Interest rates can rise or fall before closing, so a mortgage rate lock protects borrowers against rising interest rates during the lock period.
Lenders sometimes offer a loan at a certain rate plus a few points.
The points represent the fees you pay at the start of the loan to get a lower interest rate for the life of the loan.
If the interest rate drops during the lock-in period, the borrower can choose to withdraw the application.
This type of withdrawal is called the risk of loss for the lender. However, the borrower must be very careful to ensure that the mortgage loan lock agreement allows for cancellation.
In some cases, when the interest rate drops during the lock-in period, the borrower may have the option of adjusting the new lower rate using the float-down facility.
This option may be an additional cost to the borrower as it has a potential risk for the lender.
Mortgage rate locks usually may last for 15 to 60 days. At the very least, it should include a reasonable amount of time for the borrower to process their loan application. Sometimes this lock-in time can be as short as a few days.
A borrower can negotiate the terms of a rate lock and often extend the term of the lock for an additional charge or slightly higher interest rate.
What Are The Benefits Of Loan Lock?
Mortgage rate loan locks are popular with borrowers for a reason. Here are some of the benefits of locking your rate before the loan process begins:
- You are in a better position to anticipate your monthly payments once you lock your loan before the loan processing begins.
- Fixed interest rates allow you to focus on what is required to complete the closing without worrying about interest rates or being tied to a higher interest rate if there is a delay in closing.
- If necessary, you can get an extension for the lock-in period for an additional fee.
What Are The Drawbacks Of Loan Lock?
Mortgage rate locks could be a good option, but it’s not perfect. Below are two disadvantages of locking your loan:
- Rates can change at any time and there is no way of knowing if the interest rate will drop until the loan closes.
- When the interest rate drops, you’re locked into a fixed rate and you can’t get a lower rate. The exception is when the mortgage rate lock has a “float down” clause written in to cover such circumstances. But getting float down from the lender will come with additional cost.
Conclusion
A loan lock could be one of the best options if you are looking to buy a new home or refinance your current mortgage.
As a borrower ensure that you check the market condition so that you can anticipate the rate lock and get the most out of the mortgage rate lock.
Ensure that all the required documents are submitted on time so that the loan is closed before the lock period expires to avoid additional extension charges.
