When you apply for a home loan, the rate you are quoted will be the rate for that day. Usually, you don’t close on the exact day you are asking about rates, so you will have to take the risk that the rate will go up.
In reaction to this problem, many banks offer to lock in a rate for a certain length of time. They understand that there is usually a period of time between when the mortgage application is made and the loan can be settled. Many people use the interest rate when they calculate how much their monthly mortgage costs will be. Most buyers find it better to have a lock in period so they can count on their monthly mortgage payment calculation. This applies to either interest rates and points.
The lock in rate may be fixed at the application stage, the processing stage or the approval stage of the mortgage.
Perhaps you have a chance to lock in 5.5% interest with one point for 30 days. What this gives you is the privilege to have that rate, even if you do not close on the mortgage for another 30 days. This thirty day period is usual, since getting all the paperwork taken care of may take that long. Lenders are not usually willing to give such a guarantee for more than 30 days, because of the greater chance of rates increasing, unless the borrower pays a premium.
This can go both ways, because if rates decrease, you may want to cancel the loan, but the agreement must allow for it. This term is agreed upon when the lock in period is set.
Once the 30 day period is up, your agreement is over and you will be quoted whatever the new market rate is. The lender will usually allow you to extend the period, so long as there have not been wide movements in interest rates.
There are combinations in terms of lock in periods.
Locked in Rate, locked in points. The bank guarantees both the interest rate and the number of points for the lockin period.
Locked in rate, but no points locked. The base rate stays the same, but the points may change. This permits them to charge extra points if they want.
In a turbulent interest rate environment, it is extremely wise to choose a lock in period, and perhaps even pay a slightly higher interest rate for a longer period.
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