What Is a Mortgage Lock?
When you apply for a mortgage, the lender quotes you the current interest rates available for a variety of mortgage terms. After the lender reviews your application and makes a preliminary approval, you have the option to lock your rate. Mortgage rates change on a daily basis but if you lock your rate, it means that your lender agrees to write your loan based on the rate quoted to you on the day you chose to lock the rate.
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Locking a Rate
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Lenders publish mortgage rates every day but these rates reflect the average rate offered to qualified buyers and do not necessarily reflect the rate available to you. If you have poor credit or plan to make a small down payment you typically have to pay a higher rate. You cannot lock your rate until the lender has checked your credit score and established that you have sufficient income to pay monthly mortgage payments. Additionally, you cannot lock your rate until you have decided what property to buy since rates on properties such as condominiums are often higher than rates on single-family homes.
Time Frame
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Rate locks do not remain in effect indefinitely and typically most locks only last for 30 days. Generally, it takes between 45 and 60 days to process a mortgage and, if you are involved in a complicated purchase, it may take longer. Therefore, you should not lock a rate if you know the rate lock will expire before you even close on the loan. Most people do not lock a rate until they have agreed on a closing date and are close enough to it to place a lock without fear of it expiring.
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Extended Locks
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Some lenders enable you to lock a rate for up to 120 days. However, lenders who offer such long-term rate locks could run into difficulties if interest rates rise significantly before you actually close on your loan. In order to protect the lender against rising interest rates, you must pay points to lock a rate for an extended period. Points amount to upfront interest payments. Rather than paying a higher rate of interest over the course of the loan, you prepay a portion of the interest when you lock the rate. Therefore, when you "lock" a rate by paying discount points, you are effectively buying down rather than just locking your rate.
Other Considerations
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No one can accurately predict rate movements so even if your lender suggests that rates are unlikely to fall lower, something could happen in the wider economy to cause a rate drop after you lock in. To guard against rate movements some lenders allow borrowers to "float" a rate. Typically, this involves the lender monitoring rates for 30 or 45 days and retrospectively locking your rate based on the lowest rate during that period. However, when you float a rate, the lender normally imposes a floor below which your rate cannot fall and you usually have to pay a fee to float your rate.
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