Rate locks

Lenders grant rate locks as a way of guaranteeing a certain interest rate while a borrower’s application is being processed. Rate locks ‘lock in’ the borrower’s interest rate and points.

Mortgage applications can take a long time to process, up to a month in some cases. Interest rates can fluctuate considerably, even within a short period of time. For that reason, lenders developed a way to allow borrower’s to secure whatever interest rate is available at the beginning of their application.

Rate locks can save borrowers a considerable amount of money. For example, a borrower might lock in an interest rate of 4.25 percent when they submit the application. As the weeks progress, the interest rate rises to 4.75 percent. Since the borrower locked in the lower rate, his mortgage will not be affected.

Conversely, rate locks can be detrimental to borrowers who lock in a rate that lowers significantly while the application is being processed. To help offset this kind of disappointment, some lenders have developed locks that allow borrowers to take advantage of rates if they lower. This is commonly referred to as a rate lock with the option to float down. Usually, there is a fee for this service. It can be well worth your piece of mind, especially if you tend to be indecisive.

Whenever you obtain a rate lock, make sure to get it in writing from your lender. That way, there will be no question about your interest rate when it comes time to sign your mortgage. Neglecting your rate lock option can result in serious disappointment if rates rise, so it is highly recommended.