What Is Rate Lock?
A rate lock is also known as a mortgage rate lock. It is an agreement between a borrower and a lender. It allows the borrower to lock in the interest rate on a mortgage for a specific time period at the prevailing market interest rate. A loan lock protects the borrower against an increase in interest rates throughout the lock term.
When a borrower locks in an interest rate on a mortgage, the borrower and the lender are bound by it. The interest rate is fixed from the time the loan is offered until it is closed. As long as there are no modifications to the loan application during the closing period, the rate will remain stable regardless of market movements. If there is new or updated information on the borrower’s income or credit score, or if the loan amount changes, the interest rate may vary regardless. Furthermore, if the borrower changes the sort of mortgage they want or if the home’s assessment is lower or higher than expected, the interest rate may alter.
While a house buyer is going through the purchase and closing process, a mortgage rate lock assures the current rate of interest on a home loan. Some rate locks will also include a float-down clause. This allows the borrower to take advantage of lower market rates when they arise while still being protected from rises. The period is usually between 30 and 60 days.
If interest rates fall, the borrower may be able to opt-out of the agreement. The likelihood of such a withdrawal is referred to as the lender’s fallout risk. However, the borrower must exercise extreme caution to verify that the lock agreement provides for withdrawal.
Rate Lock Example
Assuming you need to secure a loan in order to carry out a project in real estate. A rate lock will help guarantee that between the period of getting the offer and the closing of the project, there will not be an increase in the interest rate which is a form of security to you as a borrower.
John is currently in the process of buying a home for $400,000 and has been accepted for a mortgage. For the next 60 days, the interest rate of the loan is fixed at 7% to protect John from any market movements.« Back to Glossary Index