When you apply for a home loan, the rate you are given will be the rate for that day. These terms may not be the ones offered to you at settlement, weeks or months later.
Most lenders today offer their prospective borrower?s a ?lock in rate?. They understand that there is inevitably a period of time between when the loan application is made and the loan is closed. Many people count on the interest rate when they figure how much their monthly mortgage payment will be. So a lock in period can be negotiated with your lender, which will keep the rate the same for a certain length of time. This applies to both interest rates and points.
Generally, banks will offer this option at any point: application, during processing, or at approval.
If the bank offered you a 30 day lock in period for a rate of 5.5%, with one point, that is what it will be. 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 offered as a marketing device since the bank usually has a small risk that rates will move too much during a short period. However, if you want a longer period, you may have to pay since lenders do not want to take such a risk for an extended time without getting something in return.
This is a two way street, because if rates decrease, you may want to cancel the loan, but the agreement must allow for it. This term is made when the lock in period is set.
After the 30 day period, naturally, the rate will go back to whatever the prevailing market rate is. If rates have not changed, a bank may consider issuing a new guarantee at the existing rate.
There are also a number of combinations you can have.
Locked in Interest Rate with Locked in Points. The lender guarantees both the interest rate and the number of points for the lockin period.
Locked Interest Rate with no locked in Points. The underlying rate is fixed for this period, but the lender keeps the right to change the points. In order to maintain 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.
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