 |
Rate
Lock
|
A
"rate lock" is an agreement between the lender
and the borrower. The longer the length of lock,
the higher the points of interest rates. The lender agrees to lock the rate at the current market in
order to protect the borrower from interest rate
movements. In consideration of the lender's action,
the borrower agrees to proceed in good faith toward
the closing of his or her loan.
A
traditional
rate lock, also called a "lock-in"
which is a lender's guarantee that you'll get a
certain interest rate, number of points, and other
cost-related features.
Duration:
A
rate lock is issued for a fixed number of days -
usually 30, 45, or 60 days. The longer the duration,
the higher the rate and/or points. It is important
that the term of the rate lock is sufficient to allow
for the closing of the loan.
Components
of Rate Lock:
There are four
components to a rate lock:
1.
Loan program
2.
Interest rate
3.
Points
4.
Length of the
lock
The longer the length
of the lock, the higher the points or the interest
rate. This is because the longer the lock, the greater
the risk for the lender offering that lock.
After a lock expires, most lenders will let you
re-lock at the higher of the original price and the
originally locked price. In most cases you will not
get a lower rate if rates drop. Lenders can lose money
if your lock expires. This is because they are taking
a risk by letting you lock in advance. If rates move
higher, they are forced to give you the original rate
at which you locked. Lenders often protect themselves
against rate fluctuations by hedging. Some lenders do
offer free float-downs––i.e.
you may lock the rate initially and if the rates drop
while your loan is in process, you will get the better
rate. However, there is no free lunch––the free
float-down is costly for the lender and you pay for
this option indirectly, because the lender has to
build the price of this option into the rate.
New-construction
rate locks:
Most lenders offer
long-term locks for new construction. These locks do
cost more and may require an up-front deposit. Most
long-term new-construction locks do offer a float-down––i.e.
if rates drop prior to closing, you get the better
rate.
Lock-and-shop
programs:
Most lenders will let
you lock in an interest rate only on a specific
property. If you are shopping for a house, some
lenders offer a lock-and-shop program that lets you
lock in a rate before you find the house. This program
is very useful when rates are rising.
More
on Rate Locks
Things
to Remember when Locking down the Rate Lock
Top |
