When you take out a mortgage, you will have to deal with the question of rate lock. The rate lock might be the most complicated issue mortgage borrowers need to understand while taking out a loan. Here are five major questions related to rate lock and their answers which will help you understand it better:
What is rate lock?
Rate lock can be defined as a guarantee that the lender will offer the borrower a particular combination of interest rate and points. Mortgage point is a fee or rebate which is equal to 1% of the loan amount. Another important factor, which is considered by the lender while offering a rate lock, is the time period or the term of the loan. Rate locks helps the borrower avoid rate fluctuations for a stipulated period of time. However, it is also true that if the interest rates get lowered, the borrowers may not be able to take advantage of it due to their pre-existing rate lock.
When can the interest rate be locked?
Buyers will have to wait till the seller agrees to their purchase offer for a particular property in order to lock the rate. During the housing boom, there were lenders who allowed the borrowers to lock the rate while they were house hunting. Lender will also look into your credit score, loan to value ratio, property type, locality, etc. in order to offer the right mortgage rate.
Till what time period can a rate be floated?
It is said that a mortgage rate can be floated until the transaction closes. However, in the real world, that is not possible. It will be better if the rate is locked at least few days or a week before the closing. This will give time to the lender for preparing disclosures and loan documents. This is known as the closing package.
What is the cost of a rate lock?
Borrowers are often informed by the lenders that there is no charge for a rate lock. Yes, it is true that rate lock is not associated with a fee. However, it is also true that rate lock isn't free. You should note that a longer rate lock involves a higher interest rate. This is more expensive for a borrower.
What if the rate lock expires before closing?
There can be times when the rate lock can get expired before the closing. In such a situation, the lender may offer you the option to extend the rate lock. If the lender does not offer you that option, the combination of rate and points might no longer be available to you. However, it is also true that this reason is considered as a good argument for a longer rate lock.
Hope the above questions and the answers have cleared your mind about rate lock. Now shop well and get the best rate for your mortgage!!