What is a rate lock?

One of the questions we get a lot, especially during times of volatile interest rates is 'What is a rate lock?'. Well, let us explore briefly what a rate lock is and its potential pros and cons to be aware of.


What is a rate lock?

A mortgage rate lock is a commitment by a lender to hold a specific interest rate for a borrower for a specific period of time, usually between 30 and 90 days (but it could vary). This agreement ensures that the borrower can secure a particular interest rate even if market rates fluctuate during the lock period.

Let's walk through the steps of the process together for clarity.

In the mortgage process, a rate lock typically occurs after a borrower has been pre-approved for a mortgage and has found a property to purchase. Once the borrower has identified the property, the lender may require an appraisal to determine its value. The lender will then issue a loan estimate, which outlines the terms of the loan, including the interest rate.

At this point, the borrower can choose to lock in the interest rate by paying a fee to the lender. The fee may be a percentage of the loan amount or a flat fee, and it can vary depending on the lender and the length of the lock period.


Pros & Cons.

The main advantage of a rate lock is that it protects the borrower from interest rate increases during the lock period. This can be especially important in a rising interest rate environment, as it allows the borrower to budget and plan for a fixed monthly mortgage payment.

However, there are also some potential downsides to using a rate lock. One risk is that if interest rates fall during the lock period, the borrower will be stuck with the higher rate. However, 'float-down' option may be available (please be sure to ask) which would give the borrower the opportunity to take advantage of lower interest rates if a borrower had already locked a mortgage rate. Additionally, if the borrower is unable to close on the loan within the lock period, they may need to pay an extension fee to keep the rate locked, or they may need to renegotiate the rate based on current market conditions.

Another consideration is that rate locks are typically not guaranteed until they are in writing. This means that verbal agreements or estimates may not be binding, and borrowers should carefully review all documents before signing to ensure that the rate lock is valid.

Overall, a rate lock can be a valuable tool for borrowers who want to secure a specific interest rate for their mortgage. However, it is important to weigh the pros and cons carefully and to work closely with a trusted lender to navigate the mortgage process and make informed decisions.




We hope this article was of value to you. For more great tips, bookmark our site and for all your mortgage needs, visit the A Team at TMFFMS.


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