Deciding Upon a Lock in Period for Your Home Loan

When you apply for a mortgage, you will be quoted a rate, but that rate is for that day only. Unless you also close on that day, which is unlikely, you will have a risk on the interest rate being higher when you do close.

In reaction to this problem, many banks offer to lock in a rate for a certain length of time. They realize that it may take some time before your house is found and actually closed on. They also realize that borrowers don?t want to take a risk on mortgage rates increasing during the period they are looking for their loan. Most buyers find it better to have a lock in period so they can figure their monthly mortgage payment calculation. You should be able to lock in either or both points and rates.

As a rule, lenders will offer this option at any stage: application, during processing, or at approval.

Perhaps you have a chance to lock in 5.5% interest with one point for 30 days. Even if you close in a month, and interest rates have increased, you will still receive the 5.5% rate on the loan. This is a normal lock in period, and a lot of lenders offer it to attract borrowers, and are willing to take the risk for this short period of time. Longer periods can also be obtained, but usually are priced more, since banks are not willing to risk rates moving against them for a longer period without some compensation for the risk.

This can go both ways, because if rates go down, you may want to cancel it, but the agreement must permit it. You have make sure you negotiate such a feature ahead of time.

If your loan is not settled during the lock in period, it will expire and your new mortgage or new lock in period will be at the higher rate. If rates have not changed, a bank might consider issuing a new guarantee at the existing rate.

There are also a great many combinations you can have.

Locked in Interest Rate with Locked in Points. Both interest rate and number of points are guaranteed.

Locked Interest Rate with Floating Points. Here, the rate may be locked, but the lender gives itself some leeway by maintaining the privelege to change the points paid. In order to keep the original rate, you may have to have extra points.

If interest rates are moving a lot, it is probably a good idea to ask your banker about lock in periods.