What is a mortgage loan lock?
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UPDATED: Dec 15, 2011
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A mortgage loan lock is when a lender agrees to lend money at a specified interest rate and number of points. The lock is contingent on the loan closing within a certain time period, but if that condition is met, then the borrower is granted a mortgage loan based on the rates and points agreed to.
Why do locks exist?
Locks are important for mortgage loans because of the fluidity and instability of the mortgage loan market. Rates change every day. Presently they hover around record lows, but during times when rates are slightly more unstable, locks are extremely important for ensuring buyers they will receive the rates they want.
If a lock is ignored, then a buyer may talk to a lender about low rates on one day, and then a month later, once the sale has been agreed to and the lender issues the loan, the buyer may be given a loan with a rate a half a percentage point higher, or more. The difference in half a percentage point over a 30-year home loan could equate to thousands and thousands of dollars.
How does one lock a mortgage?
Locks are acquired during the negotiations between buyer and lender. Because locks pose a risk to both parties, there’s a risk involved. If rates rise, then the lender loses out. If rates fall, the buyer loses out. But as long as the buyer follows through with and closes the loan within the agreed upon time period, the loan is administered.
If rates fall, buyers have the opportunity to (and often do) back out of the deal. Lenders don’t have that luxury when rates rise.
As a result, lenders back themselves by using points to secure locks. Buyers receive mortgage loan locks for periods of time related to the number of points included in their loan: the higher the points, the longer a lender will allow a lock to last.
In addition, lenders usually charge buyers a non-refundable deposit to acquire a lock. This deposit ranges, but is usually several hundred dollars. If the buyer backs out, they lose the deposit, but if they close the loan, that deposit is applied to settlement costs.
Make sure your lock is secure
When securing a mortgage loan lock, ask questions, and don’t be shy about them. The mortgage loan industry is a foreign and confusing one to most—consequently, this is a situation where the phrase no question is a dumb question fits perfectly.
After all, mortgage loans are one of the very largest purchases most people make in their entire lives. When dealing with such large amounts of money, borrowers need to make sure they educate themselves.
Real estate agents and brokers can be valuable resources when it comes to locks, and many of them have worked with various lenders in their area, so they likely already know the procedures required to close a specific lender’s loan.
That being said, some unscrupulous brokers have been reported to lead borrowers astray when it comes to locks. Buyers asked their broker to contact the lender and lock the rates, and the broker told the buyer it was done when in fact the broker didn’t contact the lender, or was unable to secure a lock.
As recommended by the Federal Reserve, borrowers need to get locks in writing—don’t settle for oral promises. To ensure a broker locks a buyer’s loan, the buyer needs to tell their broker that they want a lock and they want that lock at a specific rate, then they need to request a copy of the lock confirmation from the lender as soon as the broker receives it.