What Is a Loan Lock?

A loan lock refers to 🌠a lender’s promise to offer a borrower a specified interest rate on a mortgage and to hold that rate for an agreed-upon period of time. A loan lock helps protect borrowers from an increase in interest rates during the loc💦k period. However, mortgage lenders may charge a fee for a rate lock or add a margin to the interest rate.

How a Loan Lock Works

A loan lock guarantees a borrower that a mortgage lender will, upon closing, provide a loan with a specified interest rate. Typically, lenders offer quotes to prospective borrowers that reflect prevailing interes🐬t rates at the time of ℱthe offer rather than at the time of settlement. The quoted rate will also include a lender’s margin.

Rates can go up or down prior to closing, so a loan lock provides the borrower with protection against a rise in interest rates during the lock period. A lender will sometimes offer a loan lock at a specific rate plus a number of points. Points🧸 represent a fee paid at the origination of a loan to receive a lower interest rate over the loan’s life.

If rates go down during the 澳洲幸运5开奖号码历史查询:lock period, the borrower may have the option to withdraw from the agreement. The probability of such a withdrawal is known as a 澳洲幸运5开奖号码历史查询:fallout risk for the lender. However, the borrower should ens♔ure the lock agreꦐement allows for withdrawal.

In some cases where prevailing rates decline during the lock period, the borrower may have the option to take advantage of a 澳洲幸运5开奖号码历史查询:float-down provision to lock in a new, lower rate. As with any feature 🍌that increases interest-rate risk to the lender, a float-down provision wi𝓰ll only be available at an additional cost to the borrower.

Loan locks generally last 30 or 60 days. At a minimum, they should cover the period necessary for the lender to process the borrower’s loan application. An example of a short lock period is one that expires shortly after the completion of the loan-approval process. In some cases this lock period can be as short as a few days. A borrower can negotiate the terms of a loan lock and often extend the term of the lock for a fee or slightly higher rate.

Loan Lock vs. Loan Commitment

It is worthwhile to distinguish between a loan lock and a loan commitment. A loan commitment can refer to a commercial line of credit, but when used in reference to a♛ mortgage agreement, the term refers to a lender’s intention to lend a certain amount at an unspecified point in the future. The commitment may or may not contain a loan lock. Generally, a borrower uses a lender’s commitment to make their offer more attractive to the seller of a property in a competitive bidding environment.

The Bottom Line

A loan rate lock is an agreement between a mortgage lender and a borrower to lock in an interest rate up to the loan's closing. Since interest rates fluctuate, a rate lock helps protect the borrower from a rate increase and a higher monthly payment. However, there is a cost to the borrower, either as a fee or as a margin added to the rate by the lender.