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Rate lock basics involve the potential ups and downs of locking in an interest rate with a lender at a particular moment in time. Some lenders will agree to freeze time when it comes to interest rates. The first thing that needs to be clear with rate lock basis is that this can prove to be a double-edged sword.
How rate lock basics work
Although lenders can differ in how they handle their own rate lock basics, a typical locking in of a rate involves a lender agreeing to hold a rate frozen in time for X number of days. This means that at closing, no matter how high (or low) rates go during that time, the frozen fee will be honored by the lender.
Rate lock perks
When rate lock basics are explored, buyers might discover this option can provide some benefits. Although it is a gamble, per say, taking advantage of rate lock basics can protect a borrower from a sudden spike in interest rates. For example, it does behoove a borrower to take advantage of rate lock basics and freeze a low rate when the market seems to be on the move up.
The downfall of rate locks
When rate lock basics are looked at in a holistic manner, it will become clear that a down side does exist. If rates happen to drop, a lender might not be inclined to renegotiate the deal. Some will, but they are generally under no obligation to do so.
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