What is a Rate Lock?

It can be upsetting when people shop diligently for the best mortgage, find the best rate, apply, and when they are approved, realize the interest rate and other costs are higher than planned. As interest rates change, sometimes rapidly, this experience is not uncommon. To avoid it, many people opt to get a rate lock or lock-in. This is a guarantee, when properly constructed, that the interest rate, and perhaps other features, cannot be changed in between application and approval of a mortgage.

There are many lenders who offer a rate lock to potential borrowers and this is usually offered for a small fee. In essence, the lender agrees to keep the interest rate at the amount it is on the day of application or at some other specified point.

The average rate lock lasts about 30 days, but some people might be able to get a longer one. Sometimes they are much shorter and this means people should have all documentation they need for loan application to keep the interest rate in place. If people have been busy researching, they probably already have this information ready to provide to a lender.

An additional consideration in assessing a rate lock contract is exactly when in the application process people can obtain a lock, and also how quickly the lender approves or denies an application. Some companies try to make money by drawing out approval or not allowing a lock-in until well into the application process. Either way, the lender might benefit: by waiting for a lock to expire or by hoping interest rates increase before applicants can lock the rate. Most generous terms are a lock at application, and a quick turnaround in loan approval.

One important question in any lock-in is whether points are locked too. Points are the amount of money paid upfront to reduce payments. This money is applied directly to interest payments and may be variable depending on lender.

Some lenders offer a rate lock but not a point lock, and others will lock both at the request, and probably payment, of the applicant. Points will change if interest rates go up, and some lenders will assess the new amount due at the higher interest rate, even if the person has a lower rate loan. To avoid this issue, looking for a rate and point lock is of most use.

Should a lender be unwilling to offer a lock-in on rate and points, this might suggest challenges down the road. Borrowers should shop for lenders that offer a rate lock. These lenders suggest willingness to accommodate the requests and concerns of borrowers.