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If you want to know more, schedule a visit with us or book a free consultation with our trusted and renowned representatives. Earlier, we mentioned that there would be a penalty when you refinance your loan during the lock-in period. Refinancing here means switching to another loan package from another bank.
A mortgage rate lock is defined as an unchanging interest rate agreed upon by the lender and borrower during the mortgage process. For example, if you take a $1 million loan and have paid $200,000, this means you still have $800,000 in undisbursed loan. If you decide to refinance during the lock-in period, you have to pay $800,000 x 1.5%, which is $12,000 in penalty. This could possibly negate the savings that you enjoyed from the promotion in the first place.
To lock in or not to lock in
A float down provision allows the borrower to lock in a lower rate. If the lock agreement does not contain a float down, the borrower may decide it is cost effective to rewrite the loan entirely. Different banks can have different customized home loans for you. Don't be surprised if you will save more on a home loan that charges more interest because of the lesser closing costs involved.
Another important consideration for the borrower is how long a lock period they should seek. Like the loan lock and the float down provision, a longer lock period will likely result in a higher fee than a shorter period. Lenders will charge a fee for both the lock itself and the float down provision. To evaluate their options, the borrower must assess their exposure to interest rate risk.
Lock-in Period
What happens if you’re in urgent need of funds and have to sell off your house within the lock-in period? You’ll still have to pay the penalty unless there was a clause stating that you could get a waiver for such circumstances. In other words, read your contract carefully before signing on the dotted line if you feel that your situation may change in the near future. Depending whether you chose a fixed- or floating-rate loan, the lock-in period can be anything between 1 and 5 years.
During this period, the borrower prepares for closing, and the lender processes the loan application. A lock period offers the borrower peace of mind by protecting from rising interest rates while the lender processes the loan application before the loan is closed. A loan lock refers to a lender’s promise to offer a borrower a specified interest rate on a mortgage and to hold that rate for an agreed-upon period of time. If you had signed up for a loan with a “removal of prepayment penalty during lock-in period” clause, you could very well have your wish granted.
What Does the Lock-in Period in Home Loans Mean?
This is especially so if you know that you will refinance your home loan as soon as the lock in period has expired. A loan lock provides the borrower with protection against a rise in interest rates during the lock period. A lock period refers to a window of time, typically 30 to 90 days, during which a mortgage lender must keep a specific loan offer open to a borrower.
A longer lock period, between 45 and 90 days, offers greater protection. Generally, though, a lender will not offer as attractive an interest rate over an extended lock period. If the parties are unable to close on the loan during this period, the lender may be unwilling to extend a second lock offer at a rate attractive to the borrower.
Refinancing isn’t exactly the most enjoyable activity, so most people just stick with their loans until the lock-in period is over. If in the meanwhile, loan rates go up, then rejoice that you’ve made a good choice. This period of time is typically 30 or 90 days, but will vary based on the lender and on the borrower's underwriting. In this article, we’ve explained what the lock-in period in housing loans mean.
However, if you switch to another loan package from the same bank, this is not considered as refinancing. In this case, some banks may offer a waiver on lock-in penalty for re-pricing. If your bank happens to allow this, you’re in luck should there be a better package in the future. Just say you signed up for a loan package with bank X this year.
SIBOR is generally more stable while SWAP tend to fluctuate more. However 3-month SWAP has recently stayed consistently lower than 3-month SIBOR for an extended period of time. Forbearance is a form of repayment relief involving the temporary postponement of loan payments, typically for home mortgages or student loans.
The penalty fees can come as either a cancellation fee, break costs or a redemption fee. A locked-in interest rate occurs when a lender agrees to provide a certain loan rate as long as the homebuyer closes by a set deadline. Despite the inflationary times, looming recession, ongoing interest rate hikes and seventh lunar month, condo property sales... They want to enjoy the promotional rate, which is usually 0.3% lower than those without lock-in periods. Our opinion is to always take a HDB concessionary loan if you are eligible for one.
Yes, that’s why it’s important to shop around for the best deals before making a commitment. One might even have better deals to consider during the 3 years of waiting.
Mortgagors are usually interested in lock-in periods because they have a view of refinancing their home loans. Floating rate mortgages can also have lock-in periods, but can also be non-existent. If the lock-in period comes with a 1% penalty, a borrower with a $250,000 loan would incur a $2,500 penalty fee. For a snapshot of how rates change over the years, check out our article on bank loans for buildings under construction here.
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