Question 1

What is a rate lock agreement?

Accepted Answer

A rate lock agreement is the written document that formalizes the lender’s commitment to hold a specific interest rate. The agreement specifies: the locked interest rate, the points (if any), the lock period (start and end dates), the lock fee (if any), the float-down provisions (if available), and the conditions for the lock (the borrower must close within the lock period and meet all loan conditions). The agreement should be reviewed carefully before signing.

Question 2

What terms should a borrower review in a rate lock agreement?

Accepted Answer

Key terms: rate and points (the exact interest rate and any discount points being locked), lock period (the start and end dates; ensure enough time to close), extension policy (what happens if the lock expires: cost of extension, typically 0.125-0.375% of the loan amount per extension), float-down terms (whether available, cost, and trigger conditions), and cancellation (whether the borrower can cancel the lock and the consequences). The borrower should also verify: the rate lock is in writing (oral rate locks are difficult to enforce).

Question 3

What are the risks of a rate lock agreement?

Accepted Answer

Risks: expiration (if the lock expires before closing, the borrower may face a higher rate), no float-down (if rates decrease, the borrower is stuck at the locked rate), extension costs (extending the lock can be expensive: 0.125-0.375% per extension), and lock-in with wrong lender (if the borrower wants to switch lenders, they lose the rate lock). Best practice: lock with a reliable lender, build in a time buffer, and understand all terms before locking.

Rate Lock Agreement

Rate Lock Agreements

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