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What is a rate lock?

It can take a long time to go through the process of getting mortgage quotes, applying for a loan and finally getting a loan approval. During this time, the cost of your mortgage will fluctuate, potentially affecting whether you can afford the loan. A rate lock is insurance that the interest rate and points that you were quoted will still be valid for a set period of time.

This lock-in period is usually set between 15 and 90 days. Should your lock expire before the loan has closed, you will have to accept the terms of your lender under the current market conditions or find another lender.

Get it in writing

While some lenders will provide you with a form detailing the specifics of the lock, others may do so only verbally. If it is not provided to you voluntarily by the lender, it is a good idea to request written documentation of the lock agreement, since it can otherwise be difficult to prove in the event of a later dispute.

Rate locks do not come without a cost to the lender. If interest rates rise between the time of the lock and when the loan closes, the lender will have to absorb the additional cost of servicing the loan. In contrast, if interest rates fall during that time, the borrower will often restart the application process to take advantage of the lower interest rates. So, the lender's risk is primarily to the downside. As a consequence, the lender will pass this cost along to the borrower, either in the form of explicitly charging for a lock, building the cost into the interest rate, or both.

Buy only what you need

Since interest rates can change even more over longer periods of time, rate locks with longer periods will cost more. Just as with any other insurance, you should only purchase as much as you need. If you know that you will be able to close in 30 days, buying a 90 day lock would be overpaying.

If you can avoid paying for a lock out of pocket, however, that is generally the best idea. Paying for a lock, much like paying a significant amount as a mortgage application fee, ties you too much to the lender. An unscrupulous lender can change the terms of your loan when it comes time to close your loan and if you have paid too much for your lock, it may be too expensive to walk away.

Before you finalize your decision on a lock, you should also do some research to determine what the typical length of time it takes your lender to process a loan. You will want to consider any potential delays in the process, such as coordination with any third parties like appraisers, your homeowners association, or builder. Paying for only the length of lock that you need will help get you the best deal possible.

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