Mortgage Rate Lock

Mortgage interest rates can change from time to time. To guarantee a certain interest rate, some borrowers make use of mortgage rate locks. A mortgage rate lock is an agreement between a borrower and a lender to pin down a certain rate. This helps ensure that the rate stays the same from the initial quote to the final payment despite fluctuations in the market.

Essentially, this protects buyers from rising interest rates while in the process of purchasing a property.

Mortgage rates can fluctuate for a multitude of reasons. This includes economic changes, the federal funds rate, high or low demand for mortgages, and mortgage backed securities.

Many mortgage providers charge a fee to lock in a certain rate. Usually, this is called a lock deposit or lock fee. Mortgage rate locks are also typically set for 30 to 60 days. This is to make sure that the lock will cover the necessary period for a lender to process the loan application of a borrower. The term of the lock can generally be extended for a fee or a higher rate.

Sometimes interest rates decline rather than increase. Due to this, sometimes in addition to the standard rate lock, a float down clause is added. This allows the borrower to secure lower rates if the rates decline during the period in which they locked the rate. Essentially this clause protects the borrower in case the rates fall.

Mortgage rate locks are used primarily to protect property buyers but can have drawbacks.