When you apply for a home loan, the rate you are quoted will be the rate for that day. 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 at a later point.
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. And since many people figure how much mortgage they can pay for based the interest rate, they realize people want to maintain that rate. Most buyers find it better to have a lock in period so they can figure their monthly home loan payment calculation. This applies to both interest rates and points.
You should be able to lock in the interest rate and points either as you apply for the loan, during the loan processing or when the mortgage is approved.
Let us say you are quoted a 30 day lock in rate of 5.5% with one point. This means that even if rates go upincreased, if the borrower closed within that thirty day period, the rate would be 5.5 %. Thirty days are typical lock in periods, and are given as a marketing device since the lender usually has a small risk that rates will move dramatically during a short period. Longer periods are also available, but usually are priced more, since banks are not willing to risk rates moving against them for a longer period without being compensated for the risk.
One of the problems of a lock in rate, though, is that if rates in general go down, you may be stuck with the increased rate, unless there you have an opt out clause. Make sure your bank is willing to use to the lower rate in case of lower interest rates.
After the 30 day period, naturally, the rate will go back to whatever the current market rate is. If rates have not moved, you may be able to extend the lock in term.
Lock in periods cover a number of mixtures of terms, as follows:
Locked in Rate, locked in points. The lender guarantees both the interest rate and the number of points for a set period.
Locked in rate, however no points locked. Here, the rate may be locked, but the lender gives himself some leeway by maintaining the privelege to change the points paid. This permits them to charge more points if they want.
In a volatile interest rate environment, it is extremely wise to opt for a lock in period, and maybe even pay a slightly higher interest rate for a longer period.
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