When you make an application for a mortgage, the rate you are quoted will be the rate for that day. 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 later on.

Because of this worry by borrowers, most banks now offer a lock in terms, which means you can keep the quote you are given, for a while, anyway. They understand that there is inevitably a period of time between when the mortgage application is made and the loan is closed. The rate of interest is a critical factor in the affordability of a home, so this can be an important point. The lock in period is the time during which the prospective borrower can obtain a rate for a future closing. Both interest rates and points can be locked in.

You should be able to lock in the interest rate and points either when you apply for the loan, during the loan processing or when the loan is approved.

If the lender offered you a 30 day lock in term for a rate of 5.5%, with one point, that is what it will remain. This means that even if rates go up, if the borrower closed within that time frame, the rate would stay 5.5 %. This is a fairly common lock in period that lenders offer to attract customers. However, if you prefer a longer period, you may have to pay since banks do not want to take such a risk for an extended time without getting something in return.

Remember that the lock in period can go against you if rates go down instead of up, unless your agreement allows you to get out of the agreement. This agreement is made when the lock in period is set.

After the 30 day period, naturally, the rate will revert to whatever the current market rate is. The lender will normally allow you to extend the period, so long as there have not been wide movements in interest rates.

Lock in periods can be a number of mixtures of terms, as follows:

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

Locked in Rate, floating points. In this case, the rate may be locked, but the lender gives himself some room by maintaining the right to change the points paid. In order to keep 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 banker about lock in terms.

This entry was posted on Tuesday, June 15th, 2010 at 5:58 pm and is filed under Home Mortgage Loans. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.