When you make an application for a home loan, the rate you are given will be the rate for that day. Unless you also close on that day, which is unlikely, you have to take a chance on the interest rate being higher when you do close.
But lenders today frequently offer their clients a lock in period for their loan at the time of application. They understand that there is usually a period of time between when the mortgage application is made and the loan is closed. Many people use the interest rate when they calculate how much their monthly mortgage costs will be. The lock in period is the period during which the potential borrower can obtain a rate for a future closing. Lenders give lock in periods for both rates or points.
You may be able to lock in the interest rate and points either as you apply for the loan, during the loan processing or when the loan is approved.
An example would be if a lender gave you a lock in rate for thirty days at 5.5% interest with one point. What this gives you is the privilege to keep that rate, even if you do not close on the loan for another 30 days. This is a normal lock in period, and a lot of banks offer it to attract customers, and are willing to take the risk for this short period of time. Longer than thirty days, however, and the bank will require a payment to hold the rate since they will seek to be compensated for the additional risk.
This is a two way street, because if rates decrease, you may want to cancel the loan, but the agreement must permit it. Make sure your bank is willing to use to the reduced rate in case of decreased interest rates.
After the 30 day period, naturally, the rate will revert to whatever the prevailing market rate is. If rates have not changed, you may be able to extend the lock in term.
Lock in periods can be a few of mixtures of terms, as follows:
Rate is locked, points are locked. In this case, the bank will hold both the rate quoted and any points quoted.
Rate is locked, points are not. The base rate stays the same, but the points may change. The bank can charge additional points if they want to.
If interest rates are changing a lot, it is probably a good idea to ask your lender about lock in terms.
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