how a loan lock works
a loan lock guarantees a borrower that a mortgage lender will upon closing provide a loan with a specified interest rate typically lenders offer quotes to prospective borrowers that reflect prevailing interest rates at the time of the offer rather than at the time of settlement the quoted rate will also include a lender s margin rates can go up or down prior to closing so a loan lock provides the borrower with protection against a rise in interest rates during the lock period a lender will sometimes offer a loan lock at a specific rate plus a number of points points represent a fee paid at the origination of a loan to receive a lower interest rate over the loan s life if rates go down during the lock period the borrower may have the option to withdraw from the agreement the probability of such a withdrawal is known as a fallout risk for the lender however the borrower should ensure the lock agreement allows for withdrawal in some cases where prevailing rates decline during the lock period the borrower may have the option to take advantage of a float down provision to lock in a new lower rate as with any feature that increases interest rate risk to the lender a float down provision will only be available at an additional cost to the borrower loan locks generally last 30 or 60 days at a minimum they should cover the period necessary for the lender to process the borrower s loan application an example of a short lock period is one that expires shortly after the completion of the loan approval process in some cases this lock period can be as short as a few days a borrower can negotiate the terms of a loan lock and often extend the term of the lock for a fee or slightly higher rate 1a loan lock protects the borrower against a rise in interest rates during the lock period however the downside to a rate lock is that it can be costly if you need to extend it 1loan lock vs loan commitmentit is worthwhile to distinguish between a loan lock and a loan commitment a loan commitment can refer to a commercial line of credit but when used in reference to a mortgage agreement the term refers to a lender s intention to lend a certain amount at an unspecified point in the future the commitment may or may not contain a loan lock generally a borrower uses a lender s commitment to make their offer more attractive to the seller of a property in a competitive bidding environment 