How to Lock in Your Loan Rate
When you are shopping for mortgage rates, you have to understand that the terms you are quoted represent the terms available at the time of the quote. Unless you also close on that same day, which is unlikely, you will have a risk on the interest rate being higher when you do close.
Because of this worry by borrowers, most lenders now offer a lock in period, which means you can maintain the quote you are given, for a while, anyway. They realize that it can take some time before your house is chosen and actually closed on. Many people use the interest rate when they calculate how much their monthly mortgage payment will be. The lock in period is the time during which the potential borrower can fix a rate for a future closing. Either/or interest rates and points can be locked in.
As a rule, banks will offer this option at any point: application, during processing, or at approval.
Perhaps you have the opportunity to lock in 5.5% interest with one point for 30 days. You then have the right to borrow at 5.5% even if you are not able to close on the mortgage for the next thirty days. Thirty days are typical lock in periods, and are given as a marketing device since the lender usually has little risk that rates will move dramatically during a short period. Longer than thirty days, however, and the bank will require a payment to hold the rate since they will seek to be compensated for the additional risk.
Remember that the lock in period can turn against you if rates go down instead of up, unless your agreement permits you to get out of the agreement. This has to be done when you sign up for the lock in rate.
After the 30 day period, of course, the rate will go back to whatever the prevailing market rate is. The lender will usually allow you to extend the period, so long as there have not been wide movements in interest rates.
There can also be a combination of lock ins:
Both rate and points are locked in. The lender fixes both the interest rate and the number of points for a set period.
Rate is locked, points are not. The underlying rate is fixed for this period, but the bank keeps the right to increase the points. This allows them to charge extra points if they want.
When interest rates are rising quickly and dramatically, choosing for a lock in period is a smart move, and may even be worth paying for.