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Rate protection in loan agreements ensures borrowers are protected against rate increases during the loan application process. This provision is commonly used when applying for mortgages and allows borrowers to secure an acceptable interest rate. The laws and regulations regarding rate protection vary by jurisdiction.
Rate protection is a type of provision found in most types of loan agreements. Protection helps ensure that the borrower is protected against a rate increase during the period between loan application submission and loan approval and closing. Sometimes known as loan lock-in, this approach makes it easy to get the best possible rate on your loan, even if there is considerable fluctuation in terms of interest rates in the market today.
One of the most common examples of how rate protection can be used to the best advantage is when applying for a mortgage. Assuming the applicant wishes to purchase a home and has been offered an interest rate close to the current average fixed rate for that geographic area, the presence of rate protection means that even if that average rate should increase while the application is being considered rate, the lender will still extend that lower rate to the applicant if the mortgage application is approved. As an added benefit, most rate protection clauses also allow for what is known as a float, which means that if that average rate falls below the quoted rate, the lender can approve the loan at that lower rate.
The rate shield structure effectively allows the loan applicant to be sure of receiving an acceptable interest rate. In the worst case, the approved loan rate will be the one that applies from the date of submission of the application. At best, the lender will approve the loan and extend the borrower an even lower rate, making the loan an even better proposition for the borrower.
It is important to note that the laws and regulations regarding the fee protection structure will vary from jurisdiction to jurisdiction. In some areas, the inclusion of this type of provision is mandatory, while other areas consider rate protection optional. Since this type of provision can mean the difference between locking in an attractive rate or losing that rate while you wait for loan approval, consumers should take the time to determine if rates are protected. Take the time to identify lenders that make this type of protection available as part of their standard process for accepting and processing loan applications, and use it to your advantage to match application submission with an acceptable rate.
Smart Asset.
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