What is ‘Locked-In Interest Rate’
A locked-in interest rate refers to when a lender agrees to provide a certain loan rate as long as the borrower closes by a set deadline. Locked-in interest rates are attractive to mortgage buyers who think interest rates may rise between the offer and settlement dates. Also known as a rate-lock or rate commitment.
BREAKING DOWN ‘Locked-In Interest Rate’
Locked-in interest rates can benefit homebuyers given that rates on mortgages can rise daily (or even hourly). When a homebuyer decides to move forward with a mortgage agreement, the loan interest rate is often an important factor in their decision. But since mortgage processing can be protracted, the rate may rise between the point when the homebuyer decides to move forward and the point when he or she finalizes the agreement with the bank. A locked-in interest rate protects the homebuyer from this possibility.
By locking in the rate, the bank agrees not to change it as long as the borrower closes within a set timeframe (often 30, 45 or 60 days) and doesn’t make major changes to the application. The interest rate will no longer be “locked-in” if the borrower’s application undergoes changes such as a modified appraisal or credit score. For instance if the appraisal reveals a home value that’s higher or lower than expected, the bank may change the rate. The bank may also raise a previously locked-in rate if there are issues confirming the borrower’s income, or if the borrower misses payment on another loan and it shows up on their credit score.
Costs and Considerations for Locked-In Interest Rates
The cost for a locked-in interest rate depends on each circumstance. Some lenders offer them at no cost, while others charge a fee. (There is usually a fee involved for a lock on any commercial loan.) Other lenders don’t charge anything to lock in the rate, but do level a fee if the borrower ends up needing a deadline extension. The locked-in interest rate might come with a flat fee, or be calculated as a percentage of the mortgage sum.
In all cases, borrowers should ask to view the lock-in agreement in writing and consider reviewing it with a legal or real estate professional. Borrowers may also benefit from asking the lender what would happen if the settlement were delayed through no fault of their own. Finally, homebuyers should consider the possibility that interest rates will decrease during the course of the mortgage negotiation, in which case a lock would effectively shut them out of a better deal.