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Loan Lock Definition

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What Is a Loan Lock?

A mortgage lock refers to a lender’s promise to supply a borrower a specified rate of interest on a mortgage and to carry that fee for an agreed-upon time frame.

How a Loan Lock Works

A mortgage lock ensures a borrower {that a} mortgage lender will, upon closing, present a mortgage with a specified rate of interest. Typically, lenders provide quotes to potential debtors that mirror prevailing rates of interest on the time of the provide, fairly than on the time of settlement. The quoted fee may also embrace a lender’s margin. Rates can go up or down previous to closing, so a mortgage lock gives the borrower with safety towards an increase in rates of interest through the lock interval. A lender will typically provide a mortgage lock as a particular fee plus quite a lot of points. Points characterize a price paid on the origination of a mortgage to obtain a decrease rate of interest over the mortgage’s life.

If charges go down, the borrower could have the choice to withdraw from the settlement. The likelihood of such a withdrawal is named a fallout risk for the lender. The borrower ought to take nice care, nonetheless, to make sure that the lock settlement permits for withdrawal.

In some instances the place prevailing charges decline through the lock interval, the borrower could have the choice to make the most of a float-down provision to lock in a brand new, decrease fee. As with any characteristic that will increase interest-rate danger to the lender, a float-down provision will solely be obtainable at a further price to the borrower.

Loan locks usually final 30 or 60 days. At a minimal they need to cowl the interval obligatory for the lender to course of the borrower’s mortgage utility. An instance of a brief lock interval is one which expires shortly after completion of the loan-approval course of. In some instances this lock interval may be as quick as a number of days. A borrower can negotiate the phrases of a mortgage lock and infrequently prolong the time period of the lock for a price or barely increased fee.

A mortgage lock gives the borrower with safety towards an increase in rates of interest through the lock interval.

Loan Lock vs. Loan Commitment

It is worth it to differentiate between a mortgage lock and a mortgage dedication. A mortgage dedication can consult with a industrial line of credit score, however when utilized in reference to a mortgage settlement the time period refers to a lender’s intention to lend a specific amount at an unspecified level sooner or later. The dedication could or could not comprise a mortgage lock. Generally, a borrower makes use of a lender’s dedication to make his or her provide extra enticing to the vendor of a property in a aggressive bidding setting.

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