A loan lock is a form of protection that helps protect mortgagors from shifting interest rates. It is an agreement between a borrower and a lender that guarantees a borrower a specific rate of interest for a set amount of time. Loan locks are considered to be a safety net for both the borrower and lender, as they ensure that the agreed upon rate does not change, regardless of any fluctuations in the market.

The purpose of a loan lock is of particular importance due to the increasing fluctuation of mortgage rates over the past decade. Borrowers fear that the rate they may have qualified for could suddenly change during the loan process, making them unable to afford the loan they had applied for. Similarly, lenders fear that they could be giving a borrower a much lower rate than they could have gotten in the market, due to a sudden decrease in interest rates. A loan lock helps protect both parties interests by allowing them to guarantee a rate up until the closing.

To secure a loan lock, borrowers typically pay a one-time fee, which is usually quoted as a percentage of the loan amount. This fee is meant to compensate the lender for its risk of entering into a loan arrangement and locking a rate on the borrower’s behalf. The fees typically range from 0.25% to 1.15% of the loan amount, and a higher fee is usually paid for a loan lock with a longer duration.

The borrower and lender both benefit from a loan lock, as it helps ensure that the borrower can afford their loan and the lender can get a fair return from the loan. It should be noted that it isn’t a legally binding document. Once the loan lock period is over, the agreement is no longer valid and lenders have the right to change the loan terms. Also, it should be noted that while loan locks can provide a certain degree of security, they do not guarantee against changes in the mortgage market.

Overall, a loan lock is an agreement between a borrower and a lender that provides a guaranteed rate for a set amount of time. It offers a degree of certainty for both the borrower and lender, helping to protect them against changes in the mortgage market. However, loan locks are limited in their application and do not guarantee against changes in the mortgage market. Thus, borrowers should use them as an added layer of protection, while keeping an eye on the market in case other more advantageous options become available.