A rate lock protects a borrower against the possibility of a higher interest rate that could occur between the time he/she applies for a loan and actually closes on the loan.
QUESTION: Is it a good idea to get a rate lock? What exactly does it mean and does it put more pressure on the buyer to get the transaction done? What happens if you don’t get it done in time?
ANSWER: A rate lock is a commitment by a mortgage lender to loan an applicant a certain amount of money at a specified interest rate and points using a specified property as collateral.
A rate lock protects a borrower against the possibility of a higher interest rate that could occur between the time he/she applies for a loan and actually closes on the loan. A higher interest rate, even a few tenths of a point, could end up costing the borrower thousands of dollars over the life of the loan.
At the same time, however, a rate lock also means that the borrower might lose out if interest rates should fall. That is the risk a borrower assumes when he asks for a rate lock.
You asked if a rate lock puts additional pressure on the borrower. Yes, for the reason stated above. Interest rates might fall, although that seems unlikely in the current environment. A bigger pressure for the borrower is the rate lock time frame.
A condition of every rate lock is that the loan must close within a specified time period, usually 15 to 45 or some other number of days. The closing date will be spelled out in the rate lock contract.
Lenders will extend the lock without charge if they are responsible for a delay in closing. But in most cases, the applicant is held responsible, and the lender’s rate lock commitment will expire. The applicant is presumed to be responsible if the loan does not close on time because documenting the acceptability of the applicant’s finances and property are the responsibility of the applicant.
The lender may be responsible for the failure to close on time by taking too long to process and underwrite the loan, or by failing to identify missing information in a timely manner. That is why it is very important that any borrower who asks for a rate lock should keep a detailed journal of all document requests from the lender and when they were provided.
That way if the loan does not close on time, the applicant might be able to document that it was the lender’s fault, and the lock period extended.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: firstname.lastname@example.org.