A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.
Get your rate lock in writing, in the form of a loan commitment from the lender. Think of a rate lock as insurance that you'll get your loan at the agreed-upon rate, even if rates rise. The lock protects the lender, too, because you implicitly are promising to borrow at the specified rate, even if rates drop.
It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender's promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender's commitment only after your loan application has been approved. This commitment usually will state the loan terms that have been approved (including loan amount), how long the commitment is valid, and the lenders conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender.
Depending the type of property and the state it's located in, the purchase process from contract to settlement may take up to three months, or even longer. Locking a rate for 30 days means one would have to close on the transaction within the next 30 days. If for any reason the borrower does not close within the lock period, the lender most likely charges a rate extension fee. One should consult his loan officer, real estate agent, or attorney to determine the anticipated settlement date before locking interest rate.
The longer time frame you try to lock your rate for the more "points" it will cost or your rate will be a little higher.
It would be wise to consider whether or not it is worth the increase in your interest rate to lock into a certain rate. If the interest rates are expected to rise over the next couple months, its generally a good idea to lock the rate and pay the extra .25% or so on your mortgage.
There are many possible and unforeseeable reasons to cause the delay of settlement. For instance, the seller does not want to close because his new home is not ready to move in, the cooperative board does not hold the next board meeting to determine the eligibility of new shareholders until three weeks later, the condominium board fails to provide an indemnity letter in a timely manner, or one or more of the involved parties cannot agree on a closing date, etc. Therefore, unless one is reasonably sure that closing would take place within a certain time frame or anticipates rising interest rates, it may be prudent to start the mortgage application process and "float" the interest rate. "Floating" an interest rate simply means to delay rate lock until a later time.
If you feel comfortable with the rate you are quoted and the payment it may be wise to lock into a guarantee that the rate will not change. No one can tell you or guarantee you exactly what rates will do in the future
An experienced mortgage broker will know whether to float or lock your loan. There are many factors that an experienced broker will take into consideration where this is concerned.
The choice to lock in your rate may also depend on the type of loan you are applying for. If you are choosing a fixed rate or an ARM with a fixed rate period you will want to lock your rate in. If you are choosing an ARM that has a monthly adjustable rate, there really is no need to lock the rate in as it will be changing month to month anyway.
You may also want to look at market conditions to help in the decision to lock in a rate. Several years ago the market was a decreasing rate market so it made sense to float rates. Currently we are in a rising rate market. In any market condition day to day and week to week rates may go up or down, but there is a general trend.
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