Generally, when a borrower applies for a loan, the rate "floats", or moves up or down with market conditions, until the loan is approved. So if rates rise between application and approval, you get the higher rate. Conversely, if rates go down, you get the lower rate.
If rates are on the rise, a borrower might want to "lock in" their rate early on, before rates go any higher. This is called a rate lock and it can offer a borrower peace of mind.
Simply stated, when a borrower locks in the interest rate, the borrower gets the rate as contracted, whether rates move up or down. In a climate of rising rates, this can be very appealing. But there are a few things to be aware of before you turn the key on your rate lock.
Many borrowers believe that, once they lock in their rate, the rate is secure until they close escrow. This may not be the case. Most lenders will lock the rate for 30 days. Unfortunately, the average escrow is 45 to 60 days. So be sure to ask your lender the exact date your lock will expire.
If your lock does expire prior to closing your escrow, how do you protect your rate until closing? You could delay locking-in the loan by waiting 15 to 30 days after you have a signed purchase agreement. If you suspect rates may drop in the short term, this could be a wise strategy. But in a rising interest rate market, you could end up with a higher rate.
You could ask the lender to extend the lock-in period. Most lenders will allow this - but for a price, usually a small additional loan fee. You will need to weigh the cost of the extended lock against your guess as to whether rates will go up, down, or remain level.
Finally, some lenders offer the option that, if you lock in and rates go up, you have the contracted rate. But if rates go down, they will give you the lower rate. This option seems to be getting harder to find, but it's worth asking your lender if they offer it.
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