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What Happens When Your Interest Rate is Locked?

Shawn Von Talge


Interest Rate Lock
Last week’s blog entry focused on the risks and rewards you are subject to when “floating” your interest rate. Today’s entry will focus on those same factors only from the opposite perspective; i.e., what the risks and rewards are once your interest rate has been “locked”.

What does it mean when your rate is locked? When you lock your interest rate you are protected from any market movements that would cause interest rates to increase. However, the converse of this is true as well. More specifically, should interest rates improve you will not be able to take advantage of it as you are already locked-in at the higher rate. We all want the best of both worlds; that is we want to be protected in the event of higher rates but want the benefits should lower rates present themselves. Unfortunately what we want and what is acceptable from an lending perspective are, at times, two different things.

When you lock in your interest rate you are protected from the possibility of rates increasing before your loan closes. One of the most important factors to take into account when locking your rate is your “lock-in period”. The lock-in period defines how long your interest rate lock is good for. For example, a 30-day lock-in period means that the interest rate lock is good for the next 30 days. The typical lock-in periods are 15, 30, 45, and 60 days. Longer lock-in periods are often available at an additional fee.

Depending on the circumstances some lenders may be able to extend your lock-in period but more often than not there is a charge to do so. So if you’re looking for a 45-day lock it’s important to know that your lender is quoting you a lock period suitable to hit your closing, whether that be a purchase or refinance transaction.

Also, it’s important to note that the longer your lock period is the higher your interest rate could potentially be. For instance, all else equal, if client “A” needs a 30 day lock and client “B” needs a 60 day lock, then client “A” is going to get a comparatively better rate. Why you might be asking? This is because the lender has to guarantee client “B’s” rate for a longer period of time which translates into more risk and that risk carries over in the form of a higher rate.

As always we recommend consulting with a mortgage professional for guidance in your particular scenario.

Thanks for reading!

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