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A rate lock is a contractual guarantee that locks in a specific interest rate and points for a specified period, typically 30, 45, or 60 days, protecting borrowers from interest rate fluctuations during the loan processing and underwriting period. Once a rate is locked, the borrower is guaranteed that rate regardless of market movements, providing certainty about the loan’s cost and monthly payment. When a rate is locked, the borrower is protected from rate increases if market rates rise during the lock period. However, borrowers are also locked out of potential rate decreases unless they pay for a “float-down” option, which allows them to capture lower rates if they become available before closing. The lock expires if the loan doesn’t close within the specified lock period, potentially requiring a lock extension (which may incur fees) or accepting the current market rate. Rate locks protect borrowers from rate volatility during the loan process, which can take several weeks or months from application to closing. This protection is particularly valuable in volatile interest rate environments where rates can change significantly over short periods. However, rate locks require careful management to ensure the loan closes within the lock period, as expired locks can result in higher rates or additional costs for extensions.
  • Floating a rate - Dispatching initial disclosures and committing to a product structure without locking the rate
  • Points vs. rate - What gets locked with the rate
  • Loan - How rate locks are managed