A rate lock is a lender's commitment to hold a specific interest rate for a borrower, usually for 30 days, while their loan is being processed. It protects borrowers and banks alike from rate increases or decreases during the approval process, ensuring they receive the agreed-upon rate at closing regardless of market fluctuations. The opposite of being locked is called “floating”.
Key Takeaways:
Interest rates change on a daily basis. A rate lock protects borrower and lender by committing to a specific day’s rates in advance.
Notably, the lock does NOT lock a single rate. It locks pricing for a specific day. You can still buy up or down your rate after locking. See how rates are determined or discount points for more details.
Locks period choices are commonly 15, 30, 45, and 60 days. Longer locks cost extra. If the loan doesn’t close within the selected timeframe, that’s bad.
Locks can be extended, but policies vary by bank and can get expensive quickly.
The opposite of being locked is called “floating”.
Once you’ve locked pricing, you cannot change it no matter which direction rates move.
Mortgage rates are based on particular bond markets, and changes in those bond prices can cause banks to change their rates 2-3 times a day. The problem is you're applying for a mortgage using today's rates, even though the actual closing date is a few weeks out:
This gap between the rates of today and the rates of weeks/months down the line—which could be drastically different—is why we need the rate lock. The lock is a button I push. As long as your loan funds within your lock period, you’ll get the rate you were promised and the bank is able to take steps to protect themselves against potential market changes.
In contrast, there may be times when mortgage rates are trending downward and you'd like to try your luck getting a better rate by waiting to lock. This is called "floating". There are times when I'll recommend floating to take advantage of likely market swings, exclusive loans, and/or escrow timing. HOWEVER, I always recommend locking if you're even a little bit happy with your current rate.
Historically, most of my clients defer this decision to me. But, unless you explicitly give me that directive, locking/floating is always your decision, not the loan officer’s.