When you apply for a mortgage, the rate you are quoted will be the rate for that day. These terms may not be the ones available to you at settlement, weeks or months later.
Because of this worry by borrowers, most lenders now offer a lock in period, which means you can maintain the quote you are given, for a period, anyway. They realize that it can take some time before your home is found and actually closed on. And since many people calculate how much mortgage they can pay for based the interest rate, they realize people want to maintain that rate. Locking in a rate for a length of time frequently proves to be a good idea for a borrower. This applies to both interest rates and points.
You should be able to lock in the interest rate and points either as you apply for the loan, during the processing of the mortgage or when the loan is approved.
An example would be if a bank offered a lock in rate for thirty days at 5.5% interest with one point. This means that even if rates go upincreased, if the borrower closed within that thirty day period, the rate would be 5.5 %. Thirty days are typical lock in periods, and are given as a marketing device since the lender usually has little risk that rates will move dramatically during a short period. Longer than that period, however, and the lender will require a payment to hold the rate since they need to be compensated for the additional risk.
Remember that the lock in period can go against you if rates go down instead of up, unless your agreement allows you to get out of the agreement. This has to be done as you sign up for the lock in rate.
If your loan is not settled during the lock in period, it will lapse and your new mortgage or new lock in period will be at the higher rate. If there haven’t been any significant movements in rates, the bank may be willing to renew.
Lock in periods cover a few of mixtures of terms, as we see:
Locked in Rate, locked in points. In other words, the bank will keep both the interest rate and number of points for 30 days.
Rate is locked, points are not. The base rate remains the same, but the points may vary. This permits them to charge more points if they want.
When interest rates are moving up quickly and dramatically, opting for a lock in period is a smart move, and can even be worth paying for.
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