Deciding Upon a Lock in Period for Your Mortgage
When you are looking for mortgage rates, you have to realize that the terms you are quoted represent the terms in force at the time of the quote. Usually, you don?t close on the same day you are inquiring about rates, so you will have to take the risk that the rate will go up.
In reaction to this problem, many banks offer to lock in a rate for a certain period of time. They realize that it can take some time before your house is found and actually closed on. The rate of interest is a critical factor in the affordability of a home, so this can be an big point. The lock in period is the period during which the prospective borrower can fix a rate for a future closing. You should be able to lock in either or both points and rates.
This feature can be made available at the time of application, while the mortgage is being processed, or after it is approved.
An example is if a lender 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 thirty day period, the rate would be 5.5 %. This is a normal lock in period, and a lot of banks offer it to attract customers, and are willing to take the risk for this short period of time. Longer than thirty days, however, and the lender will require a payment to hold the rate since they need to be compensated for the additional risk.
One of the problems of such a rate, though, is that if rates in general decrease, you may be stuck with the increased rate, unless there you have an opt out clause. This term is agreed upon when the lock in period is set.
Once the 30 day period is up, your agreement is over and you will be quoted whatever the new market rate is. If rates have not changed, you may be allowed to extend the lock in period.
There are also a number of combinations you can have.
Locked in Interest Rate with Locked in Points. In this case, the lender will hold both the rate given and any points quoted.
Locked in rate, but no points locked. The base rate stays the same, but the points may vary. In order to maintain the original rate, you may have to pay extra points.
If interest rates are changing a great deal, it is probably a good idea to ask your lender about lock in periods.
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