What is a Locked-In Interest Rate
locked-in interest rate refers to when a lender agrees to provide a loan interest rate as long as the borrower closes by a set deadline. Locked-in interest rates are attractive to mortgage buyers who think the rates may rise between their placing an offer and the final settlement dates. Locked-in rates are 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 essential factor in their decision. However, the processing of a home sale can be an extended process. The market interest rate may rise between the point when the home buyer decides to move forward and the time when they finalize the agreement with the bank. A locked-in interest rate protects the homebuyer from the possibility the interest rate may rise.
By locking in the rate, the bank agrees not to change it as long as the borrower closes within a set timeframe. This timeframe is often 15, 30, 45 or 60 days and does not make significant changes to the application. The interest rate will no longer be locked-in if the borrower’s application changes such as with a modified appraisal or a change in the buyer's credit score.
For instance, if the appraisal reveals a home value which is 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 in confirming the borrower’s income, if the borrower misses a payment on another loan, and if there are changes in their credit score.
Costs and Considerations for Locked-In Interest Rates
The expense of a locked-in interest rate depends on the various lending institutes and the circumstances of the individual borrower.
- Some lenders offer short-term rate locks at no charge, but the buyer can expect to pay a higher percentage for more extended locked-in rates
- If a borrower needs an extension for the closing date lenders may charge between a fee based on the loan amount
- The locked-in interest rate may be a flat fee
- Calculations for locked-in rates may be a percentage of the total mortgage sum and usually run between .25 and .50-percent.
- For commercial loans, there is usually a fee involved to lock-in a rate
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 before signing. Borrowers may also benefit from asking the lender what would happen if a delayed settlement occurs through no fault of their own. As reported by CNN Money, 110,000 Wells Fargo customers paid expenses for rate lock extensions due to the bank's mishandling of loan documents. These customers submitted their paperwork in a timely fashion, but slowdowns in the bank caused the settlement date to go beyond the locked-in period.
Finally, homebuyers should consider the possibility that interest rates will decrease during the mortgage negotiation, in which case a lock would effectively shut them out of a better deal.