Is a Lock In Period a Good Idea for Your Home Loan?

When you apply for a home loan, you will be given a rate, but that rate is for that day only. 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.

Most banks today offer their prospective borrower?s a ?lock in rate?. They understand that there is usually a period of time between when the mortgage application is made and the loan is closed. Many people count on the interest rate when they calculate how much their monthly mortgage payment will be. So a lock in period can be negotiated with the lender, which will fix the rate for a certain length of time. Banks offer lock in periods for both rates or points.

As a rule, lenders will offer this option at any stage: application, during processing, or at approval.

Let us say you are offered a 30 day lock in rate of 5.5% with one point. Now, 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 long. However, if you prefer a longer term, you may have to pay since banks do not want to take such a risk for an extended time without getting something in return.

This can go both ways, because if rates decrease, you may want to cancel the loan, but the agreement must allow for it. This has to be done as you apply for the lock in rate.

If your loan is not settled during the lock in period, it will lapse and your new mortgage or new lock in period will be at the higher rate. If rates have not changed, you may be able to extend the lock in term.

There are also a great many combinations you can have.

Rate is locked, points are locked. The lender guarantees both the interest rate and the number of points for a set period.

Locked Interest Rate with no locked in Points. In this case, the rate may be locked, but the lender gives itself some leeway by maintaining the privelege to change the points charged. In order to keep the original rate, you may have to have extra points.

If interest rates are changing a great deal, it is probably a good idea to ask your banker about lock in periods.