Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Mortgage Rate Lock Deposit

What it is:

A mortgage rate lock deposit is a sum of money that a borrower must pay the lender to lock in a specific interest rate until a borrower's mortgage is approved and given out.

How it works (Example):

When a mortgage originator finds a mortgage rate for a borrower, the offering lender often charges the borrower a fee to hold that rate until his mortgage application has been approved. Mortgage rate lock deposit amounts increase according to the time it takes for a borrower to complete the mortgage application process. If the borrower decides to not complete the application process, the lending bank keeps the entire mortgage rate lock deposit.

For example, if a borrower pays $100 to lock in a 3.5% rate and then decides not to apply for the mortgage, the offering lender is allowed to keep the $100.

Why it Matters:

When offering a mortgage rate, lenders are exposed to the risk that interest rates will rise after making the offer. When this happens, the difference between the offered rate and the new, higher rate represents the opportunity cost of waiting for a borrower to complete a mortgage application. A mortgage rate lock deposit effectively compensates lenders for holding off on originating another mortgage at a potentially higher rate. Though many lenders have stopped charging mortgage rate lock deposits, prospective borrowers should understand that lenders that do charge them are likely to offer more competitive rates.