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When you are in that period of time between the approval and closing of a mortgage loan, the lender may offer to lock in your rate. It is important that you understand what a rate lock is and when it can help….
What is a Rate Lock and how does it work?
When you are in that period of time between the approval and closing of a mortgage loan, the lender may offer to lock in your rate. You may be wary of this offer, but it is important that you understand what a rate lock is and what it can and can’t do.
What is a rate lock?
Quite simply, a rate lock is where the lender keeps your rate at the same level for a certain period of time. Every day the mortgage rate changes. A rate lock is designed to protect a borrower against the rate rising between the lock date and closing. It gives borrowers some piece of mind that they will know what they are going to pay at closing and what their rate will be over the life of the loan (assuming they have a fixed rate mortgage).
How rate locks work for fixed-rate mortgages
The process for getting a rate lock is quite simple. All you need to do is ask your lender to lock the rate. Once he or she locks it in, your interest rate will stay the same until your loan closes. Assuming that the closing happens in a timely manner.
It is an easy process, but there are some things you should know about it.
The first thing you should know about rate locks is that they are usually for a limited amount of time. Lenders generally offer rate locks from 15, 30, 45 or 60 days. During that time, the rate that you are offered will not go up or down. This protects you if the rates do rise.
But this protection is far from being complete. The only things that are included in these rate locks in a fixed rate mortgage are the interest rate and points. Points are an upfront charge that is a percentage of the loan amount. They are usually paid to get a lower interest rate.
What are not covered by rate locks are the fees charged by lenders. Some lenders can charge higher fees at closing to cover part of their losses. This doesn’t mean that all lenders do it, but these fees are not covered by a rate lock.
How does a rate lock work on an ARM?
A rate lock on an ARM is a little trickier, and far more confusing, than on a fixed-rate mortgage. How can you lock in an interest rate that changes over the course of a loan? Rate locks on ARMs work similarly as they do for fixed-rate mortgages. In both cases the locks are:
- For a limited time (15-60 days)
- Fees are not included in a lock
Since an ARM is a little more confusing that a fixed-rate mortgage, more things are covered by a lock. In an ARM, the things that are covered by a rate lock are:
- Initial rate (the low “teaser” rate)
- The margin (the amount added to the rate index on a rate adjustment)
- The maximum rate
A rate lock on an ARM, however, does not include caps. The caps are part of the definition of your ARM, so there is no need to lock them in. If you take out an ARM, make sure that you have the lender spell out all the terms of your ARM before locking in any of the rates associated with the loan.