A rate lock is a short-term agreement for a lender to “hold” an interest rate on a home while the buyer negotiates the actual sale.
Rate Lock Requirements
Requirements for rate locks vary from state to state. Within states, individual lenders often set their own individual policies and practices. For instance, a broker may require a signed contract before he or she agrees to lock in a rate.
Some brokers will make a verbal agreement to lock in a rate but will not put that agreement in writing. Mortgage experts suggest that buyers decline offers of oral lock-in contracts. If something goes wrong and the buyer needs to sue the lender, it can be very difficult to prove that an oral contract existed.
Rate Lock Terms
A rate can only be locked in for a certain number of days. The most common period is 30 to 60 days, although rates can be locked in for as long as 120 days. If there is a problem with the sale and the locked-in rate expires before the sale is negotiated, the buyer will usually have to accept the loan at the prevailing interest rates or look elsewhere for a better deal.
Unpredictable Interest Rate
When a buyer attempts to lock in an interest rate on a mortgage, he or she is most concerned about interest rates climbing. Sometimes, however, the opposite happens and rates actually go down. In this case, the buyer may be locked in at a rate far higher than the prevailing rates. Even among mortgage experts, locking in rates has the reputation for being a guessing game and a gamble.
A cautious buyer may want to pay extra money for what is known as a “float down” locked rate. In this case, the buyer can lock in the rate at the time he or she signs the contract, however, if the rates go down, the buyer’s lock-in rate similarly decreases. If the rates go up, the lender abides by the original lock-in rate.
Used carefully, rate locks can be an important tool for keeping the interest rates on a loan as low as possible.