When you are shopping for mortgage rates, you have to realize that the terms you are quoted represent the terms available at the time of the quote. Obviously, you will not be able to close on your new house that same day, so you have to be concerned about what the rate will be later on.
In reaction to this problem, many lenders offer to lock in a rate for a certain period of time. They recognize that the time between deciding to shop for a home and actually finding and closing on it may take some time. They also recognize that borrowers don’t want to take a risk on mortgage rates increasing during the period they are looking for their loan. Locking in a rate for a length of time often proves to be advantageous for a borrower. You should be able to lock in either or both points and rates.
The lock in rate can be fixed at the application stage, the processing stage or the approval stage of the mortgage.
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 rates have increased, you will still get the 5.5% rate on the mortgage. This thirty day period is usual, since getting all the paperwork done may take that long. Longer than that period, however, and the bank will require a payment to hold the rate since they will seek to be compensated for the additional risk.
One of the problems of a lock in rate, however, is that if rates in general go down, you may be stuck with the higher rate, unless there is an opt out clause. This agreement is agreed upon when the lock in period is fixed.
After the 30 day period, of course, the rate will go back to whatever the current market rate is. If rates have not moved, you may be allowed to extend the lock in term.
You can have a combination of lock ins:
Locked in Rate, locked in points. Both interest rate and number of points are guaranteed.
Rate is locked, points are not. The base rate remains the same, but the points may change. This allows them to charge more points if they want.
If interest rates are moving a great deal, it is probably a good idea to ask your banker about lock in terms.
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