Are you familiar with a rate lock? It’s a common term used when it comes to mortgages and, depending on your situation, can potentially save you hundreds of thousands of dollars. So what exactly is it all about?
As its name suggests, a mortgage rate lock protects the borrower from having to face a potential mortgage rate increase or fluctuation during the period that the lock remains active. Lenders are guaranteeing borrowers that their interest rates and points will remain fixed. What is a point? A point is a rebate or fee tacked onto the loan amount, representing one percent of it. Should rates rise, a borrower will still be paying the lower rate. This is great, but it also means that if they fall, the borrower would still be required to pay the higher, original rate that was “locked”.
If a buyer is interested in locking their rate, he or she will have to wait for a seller to accept their purchase offer. There are also other factors involved, such as the buyer’s credit score, the type of property that’s being purchased, and of course, current rates.
Should the rate lock period expire prior to closing, a lender has the option of offering an extension. However, if an extension is not possible then the borrower will be required to pay whatever the current rate is which could be higher.