Loan Lock Definition

Decoding Loan Locks: Understanding Mortgage Interest Rate Guarantees

Unraveling Loan Locks: A Closer Look

What is a Loan Lock: A loan lock is a commitment made by a mortgage lender to provide a borrower with a specified interest rate for a predetermined period. It serves as a safeguard against fluctuations in interest rates between loan application and closing.

How Loan Locks Operate: When a borrower secures a loan lock, they are assured that the mortgage lender will honor the agreed-upon interest rate at the time of closing. This shields the borrower from potential rate hikes during the lock period, offering stability in a volatile market. Borrowers may also have the option to pay points upfront to secure a lower interest rate.

Mitigating Risks: While a loan lock protects against rate increases, it may pose a fallout risk for the lender if rates decline. Borrowers should review lock agreements carefully to determine if withdrawal options are available. Additionally, some agreements may include a float-down provision, allowing borrowers to capitalize on lower rates if they become available during the lock period.

Duration and Flexibility: Loan locks typically span 30 to 60 days, ensuring adequate time for loan processing. Borrowers can negotiate lock terms and may extend the period for a fee or slightly higher rate.

Loan Locks vs. Loan Commitments: Understanding the Contrast

Loan Lock vs. Loan Commitment: While a loan lock guarantees a specific interest rate for a set period, a loan commitment denotes a lender's intention to lend a certain amount at a future date. A commitment may or may not include a loan lock, and borrowers often leverage commitments to enhance their offers in competitive real estate markets.