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The California Lock-In Agreement: What is it and why is it important?

If you are a homeowner in California, you may have come across the term “lock-in agreement” when discussing your mortgage or refinance. A lock-in agreement, also known as a rate lock or rate commitment, is a contractual arrangement between a borrower and a lender to lock in a specific interest rate for a set period of time.

Why is this important? Interest rates on mortgages can fluctuate daily, sometimes even hourly, and can have a significant impact on your monthly mortgage payment and overall loan costs. By locking in a rate, you can protect yourself from rate increases while your loan application is being processed.

In California, the lock-in agreement is governed by the Department of Business Oversight (DBO) and the California Financial Code. The DBO requires lenders to provide a written lock-in agreement to borrowers that specifies the interest rate, the length of the lock-in period, and any fees associated with the lock-in.

One key aspect of the California lock-in agreement is the “float down” option. This allows borrowers to take advantage of a lower interest rate if rates drop during the lock-in period. However, this option may come with additional fees and restrictions, so it is important to understand the terms of your lock-in agreement before agreeing to a float down.

It is also important to note that lock-in agreements typically have expiration dates, so it is important to complete your loan application and close on your loan before the lock-in period expires. If your loan is not closed before the lock-in expires, you may be subject to a higher interest rate or additional fees.

In summary, the California lock-in agreement is an important tool for protecting borrowers from interest rate fluctuations during the loan application process. By understanding the terms of your lock-in agreement, including the float down option and expiration date, you can make informed decisions when applying for a mortgage or refinance in California.