Posted on: 29th Oct, 2013 02:48 am
Rate Lock is a commitment by a lender to the borrower guaranteeing a specified interest rate on a loan, provided the loan is closed within the specified period of time. Rate locks are good for a fixed number of days. Typically 30, 45, or 60 days are locked but sometimes shorter or longer periods are available.
There are four components to a rate lock:
1.Loan program
2.Interest rate
3.Points and
4.Length of the lock.
The longer is the length of the lock, the higher is the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.
For example,
Hary applied for a loan of $500,000 for 3 years to Carole on 1.1.04. He wanted an interest rate of 4%, she agreed to it provided if the loan closes within 20 days of application i.e. by 1.20.04. John closed the loan by 1.20.04, thus the rate was locked by Carole.
There are four components to a rate lock:
1.Loan program
2.Interest rate
3.Points and
4.Length of the lock.
The longer is the length of the lock, the higher is the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.
For example,
Hary applied for a loan of $500,000 for 3 years to Carole on 1.1.04. He wanted an interest rate of 4%, she agreed to it provided if the loan closes within 20 days of application i.e. by 1.20.04. John closed the loan by 1.20.04, thus the rate was locked by Carole.
It should be noted here that if interest rates increase during your lock-in period, then you will not be impacted. But, if the rates drop, you will not be able to take advantage of those lower rates.
Yes, if you are thinking to take out a loan, then you should lock the interest rate as soon as possible. This will avoid any change in the interest rate of your loan if by chance, it increases or decreases in the market.