Mortgage rates have dipped a bit, offering a new opportunity to refinance.
What is a rate lock?
A rate lock is a freeze of the interest rate on a mortgage loan for a period of time. It is a guarantee from a lender that the mortgage rate offered to a borrower will remain available to that borrower for a specific amount of time.
Lenders offer rate locks to encourage consumers to obtain mortgage loans. The rate lock generally is good until the borrower can go through the process of closing on the loan.
The borrower locks in a rate because it is the lowest rate offered at the time. Both the lender and the borrower agree to the terms of the rate lock. It is not a legally binding agreement, however, in obtaining a loan. In some cases, borrowers may elect to walk away from the rate if interest rates fall. And if interest rates are on the rise, some lenders may allow the locked-in rate to expire.
Mortgage rates change as often as several times a day. Locking in a rate allows the borrower and the lender to agree to specific terms of a loan. Rate locks typically last between 30 and 60 days.
A longer rate lock usually involves a higher interest rate, which costs the borrower more. Locking in a lower interest rate saves money, but it poses more risk for the borrower because the low-rate guarantee doesn’t last as long.
Rate lock example
The James family has found a home they want to buy, but they want a low interest rate. A local bank offers an attractive rate, so the James family applies for a mortgage there. The lender offers to lock in the rate for 30 days, hopefully giving the James family time to close on the loan.
Use Bankrate’s calculator to figure out how much house you can afford to buy.