What Is a Rate Lock?

A mortgage rate lock is an agreement made by both the lender and the borrower stipulating a fix interest rate for a number of days (usually 30, 45, 60, 90 and even 120 days, depending on the agreement) from the time the mortgage approval is given until the closing of the mortgage or loan. This means the interest rate agreed upon during the pre-closing period will still be available upon closing even if the interest rate in the market rises.

The purpose of the rate lock is to protect the borrower against mortgage rate fluctuations in the market, especially if they are on the incremental side. On the other hand, if the market rate lowers after the rate lock, the borrower will be at a disadvantage.

Some exemptions when locking rates

A float-down rate lock is a special agreement which gives the buyer the option to take advantage of a lower interest rate during the lock period. This, however, must be clearly stipulated in the rate lock agreement.

Rate lock fee

Asking for a rate lock will cost you money, the amount of which is either a flat fee, added into the interest rate you lock in, or based on a percentage of the total amount of your mortgage. For a rate lock that lasts less than 60 days, for example, you could pay anywhere between 0.25 and 0.50 percent of the total loanable amount, maybe more.

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Longer lock terms also mean a higher fee. Furthermore, rate lock extensions are usually costlier than the normal rate lock term. So, it is advisable to compare prices first before signing up for a rate lock extension.


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