The most significant part of the mortgage process involves locking in a rate. The process is simple, you give your lender a written commitment that you will repay the loan based on the stated interest rate. If you break the commitment the lender can foreclose on your property, thus seizing your home. Locking in a rate is essential because a home loan is an expensive purchase and the lender wants to make sure they collect the most amount of money out of the money they are lending out. There are two types of lock in agreements a fixed rate and a floating rate. The latter is preferable because once it ends, you will be locked into a rate that is known to not change for the length of the loan.
How a Lock In Agreement Is Entered
When you decide to buy a home you’ll sign an agreement which will create a rate lock. By entering the lock in agreement you agree to repay the loan at the stated rate for the stated amount of time. If the lender is correct then after X months your interest rate will go up or down depending on the market conditions. During this time, your lender will have the option to foreclose if you fail to pay. Once the lock in period is over the lender has the option to collect on your loan if you default on the loan. The lenders lock in rate is important for investors as the rate is known to be the same as the bank’s rate.
The Factors That Affect a Lender’s Rate
There are numerous factors that affect the lock in rate of a lender. The most common ones are the down payment, credit score, loan amount, length of the loan and loan terms. The longer a loan is the more it costs the lender. For most lenders the longer a loan, the higher the rate. Most lenders will set aside a specific amount for the purpose of loss contingency. This is important for investors as loss contingency allows for a return if the lender does not collect. The loan terms can change as well. Short term loans, or loans under X% can change terms to long term loans or loans over X%
How Lock In Works
When a borrower signs a lock in agreement, the lender enters into an agreement with the borrower. Once the lock in period expires the lender may exercise its option to foreclose. The terms of the lock in agreement are known as the lock in period. The lock in period is the length of time that an agreement can be entered into between the lender and borrower. Lock in period can vary from state to state but generally it is 30 to 45 days.
The lock in agreement has “lock” in it because when the lock in period expires the lock in will occur. This means the borrower will have to either make the full payment or else the lender will be able to foreclose. The lender’s option to foreclose can occur anytime within the lock in period.
Here are some common terms of a lock in agreement. The lock in amount is also known as the contingency. The lock in period is the time period that the borrower is locked into the loan and the lock in amount is the monthly loan payment. If the borrower fails to make the full payment the lender can elect to foreclose
There are a number of options available for locking into a loan. A borrower can opt to have the loan amount increase quarterly by the lock in amount. A borrower can also opt to pay off the entire loan amount by the end of the lock in period.
Once a lock in period expires, the lock in amount and the monthly loan payment can be increased by the lock in amount.
What if the borrower misses the payment?
If the borrower makes the full payment during the lock in period, the lender can elect to foreclose. If the borrower misses the payment or the lender elects to exercise the option to foreclose, the lender can require the borrower to complete an accelerator plan which will lower the loan balance to an amount that will allow the lender to recover the loan.
As a borrower, be certain that you understand the terms of the lock in agreement and how they may affect you. Be sure to read carefully and ask questions. Be aware of the time period the agreement is valid.
Be aware of the factors that may affect your ability to pay which include interest rates, fees, points, and fees. Consult with your CPA for accurate information.