That is a subject you might be hearing more about in coming months, with interest rates rising instead of dropping as they have in the past few years. When interest rates rise, rate locks become very important.
When you lock in a mortgage rate, you and the lender agree that even if interests rates rise, you will get the loan at the same rate. This protects borrowers from rising interest rates while the borrowers go through the home buying process.
These rate locks usually have a time restriction. You will be able to get the current interest rate for, say, 10 to 60 days. That will give you time to complete your home purchase.
What the rate lock does do is guarantee an interest rate if all things remain the same. However, some situations will cause the interest rate to change.
One example: Suppose the buyer wants a loan for $100,000 but the appraisal on the home comes in at $90,000. Or maybe it comes in at $125,000. In this situation, the interest rate will change.
Similarly, if the borrower's financial situation changes, the rate could change and the loan could change. If there is a sudden drop in a credit score or if the borrower loses a job, the rate could change or the loan could even be in jeopardy.
In the current market, interest rates are rising slightly, so a rate lock could be a good advantage for a borrower. But in times when the prevailing rates are declining, the borrower might get a float-down provision to take advantage of lower rates. That provision might come with an extra fee.
In some cases, the lender might ask for a lock deposit to ensure that both borrower and lender intend to keep the agreement.
