 Sam
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Joined: 21 May 2005
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Location: CALIFORNIA
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 Posted: Sun Apr 04, 2004 5:46 am Post subject: Lock-In and Floating interest rate |
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A lock-in rate is a lenders promise to hold a certain interest rate for a specified period of time, while your loan application is processed. After the specified period, the lock-in rate automatically moves to a floating rate unless you negotiate another lock-in rate.
Whereas, with a floating rate, lenders may increase or decrease the interest rates as the rate in the market get change. This means your monthly payment may fluctuate over time.
With rate lock-in option, you can make your payments fixed but if you will be penalized for making less payments or even a lump sum payment. On the other hand, with a floating rate, you can either make reduced payments or lump-sum payments without a penalty. It is also easier to consolidate other debts into floating rate loans rather than the fixed rate loans.
However, floating rates also have some disadvantages. For instance they are usually higher than fixed rates and when rates increase your payments also get higher thereby putting you into a tight budget.
For example, Jack has applied for a loan for $400,000 for 2 years from Andrew. The interest rate at the time of application was 3%. If Jack believes that the interest rate may rise to 5%, he should lock the interest rate during the lock-in period, and if he believes that the interest rate may drop to 2% he should let the interest rate float.
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