When a bank offers you a rate on your home loan, it is usually good for that day only. These terms may not be the ones available to you at settlement, weeks or months later.
Most banks today offer their prospective borrower?s a ?lock in rate?. They realize that it may take some time before your home is found and actually closed on. And since most people figure how much mortgage they can pay for based the interest rate, they realize people want to maintain that rate. The lock in period is the time during which the prospective borrower can obtain a rate for a future closing. This applies to either interest rates and points.
This feature is typically available at the time of application, while the loan is being processed, or after it has been approved.
Let us say you are offered a 30 day lock in rate of 5.5% with one point. Now, even if rates go upincreased, if the borrower closed within that time frame, the rate would be 5.5 %. This is a fairly common lock in time that banks offer to attract customers. Longer than thirty days, however, and the bank will require a payment to hold the rate since they need to be compensated for the additional risk.
This is a two way street, because if rates go down, you may want to cancel it, but the agreement must permit it. This has to be done as you apply for the lock in rate.
If you don?t close on your mortgage during the lock in period, the guarantee runs out, and you will be quoted a new rate at prevailing rates. If rates have not changed, a bank may be willing to issue a new guarantee at the existing rate.
There are combinations in terms of lock in periods.
Locked in Rate, locked in points. In this case, the bank will hold both the rate quoted and any points quoted.
Locked in rate, however no points locked. The lender may choose to protect itself by setting a fixed base rate for the lock in period, but maintaining the right to change the points to maintain the rate. This permits them to charge extra points if they want.
If you are in a period of very volatile interest rates, it may be well worth your while to have a lock in period, even if you have to pay for it.
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