What is a loan foreclosure?
A loan lock-in refers to a lender’s promise to offer a borrower a specified interest rate on a mortgage and to maintain that rate for an agreed period.
How a loan foreclosure works
A loan lock assures a borrower that a mortgage lender, at closing, will provide a loan with a specified interest rate. Typically, lenders offer quotes to potential borrowers that reflect the interest rates in effect 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 before closing, so a loan foreclosure provides the borrower with protection against rising interest rates during the foreclosure period. A lender will sometimes offer a loan guarantee at a specific rate plus a certain number of points. Points represent fees originally paid for a loan to receive a lower interest rate over the life of the loan.
If rates fall, the borrower may have the option to opt out of the contract. The probability of such a withdrawal is known as risk of fallout for the lender. The borrower should however take great care to ensure that the foreclosure agreement allows for the withdrawal.
In some cases where going rates fall during the lock-in period, the borrower may have the option of taking advantage of a floating layout to lock in a new lower rate. As with any feature that increases the interest rate risk to the lender, a floating provision will only be available at additional cost to the borrower.
Loan locks typically last 30 or 60 days. At a minimum, they should cover the period needed by the lender to process the borrower’s loan application. An example of a short lock-in period is one that expires shortly after the loan approval process ends. In some cases, this lockout 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 a slightly higher rate.
A loan lock-up provides the borrower with protection against rising interest rates during the lock-up period.
Loan Lock vs. Loan Commitment
It is worth distinguishing 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 a future time. undetermined. The commitment may or may not contain a loan lock. Typically, a borrower uses a lender’s engagement to make their offer more attractive to the seller of a property in a competitive bidding environment.