When a bank offers you a rate on your home loan, it is usually good for that day only. These terms may not be the ones offered to you at closing, weeks or months later.
Because of this concern by borrowers, most banks now offer a lock in period, which means you can maintain the quote you are given, for a period, anyway. They recognize that the time between deciding to shop for a home and actually finding and closing on it may take a while. Many people use the interest rate when they figure how much their monthly mortgage costs will be. The lock in period is the time during which the potential borrower can obtain a rate for a future closing. This applies to both interest rates and points.
You may be able to lock in the interest rate and points either when you apply for the mortgage, during the loan processing or when the loan is approved.
An example would be if a bank offered a lock in rate for thirty days at 5.5% interest with one point. This means that even if rates go upincreased, if the borrower closed within that time frame, the rate would stay 5.5 %. This thirty day period is the norm, since getting all the paperwork done may take that length of time. Longer than that period, however, and the lender will require a payment to fix the rate since they will seek to be compensated for the additional risk.
Remember that the lock in period can turn against you if rates go down instead of up, unless your agreement allows you to break the agreement. Make sure your bank is willing to use to the lower rate in case of decreased interest rates.
If your loan is not settled during the lock in period, it will lapse and your new loan or new lock in period will be at the increased rate. The lender will normally permit you to extend the period, as long as there have not been wide movements in interest rates.
Lock in periods can be a few of mixtures of terms, as follows:
Rate is locked, points are locked. In this case, the bank will hold both the rate given and any points quoted.
Locked in Rate, floating points. The base rate stays the same, but the points may change. You may have to pay additional points to obtain the guaranteed rate.
If interest rates are moving a lot, it is probably a good idea to ask your lender about lock in terms.
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