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A mortgage rate lock is intended to protect a homebuyer from the risks of significant changes in interest loan rates between the point of loan application to the time of loan closing. Banks offer rate lock periods to attract prospective borrowers and to get an initial commitment to borrow. Typically, you can lock a rate when you submit an application and get a tentative initial approval based on credit scores and other qualifying criteria.
Selecting the Time Frame
The common lock periods are 30, 45, 60 or 90 days, according to an August 2010 article on the Bankrate website. A longer lock period gives you the best protection against rates changing before you can close on a home. This is especially useful for a small number of borrowers who aggressively lock in a good rate before agreeing to a home purchase. A shorter period may make sense if you have the ability to close within that time frame but want to monitor rates.
Risks and Rewards
The lock period is essentially
a balance of the potential increases or decreases in loan rates. During the lock period, if rates go up, you still get the locked-in rate. This is the main advantage of locking in. As a less risk-averse buyer, you could take a gamble that rates will decrease and wait until the last possible moment to lock in a rate and complete your application. Rates are typically unpredictable from day to day and week to week, though they typically follow upward or downward trends over time.
Banks often charge slightly lower rates and fewer discount points if you elect a shorter lock period. With a 90-day lock, you may pay a fractionally higher loan rate and one or more discount points on the loan. In some circumstances, according to the legal site Nolo, a borrower can be released from a locked rate if rates improve. For example, some lock periods have float provisions that give you the option of electing a new rate later. Or you might be able to "buy" a new rate by paying additional discount points.