If you are looking to purchase or refinance a home, it's important to understand how a mortgage rate lock-in can help you get the most competitive interest rate. In the broadest sense, they are designed to help you save money by locking in a favorable mortgage rate, but some of the details of these agreements can potentially cost you if you are not aware.
When you get a mortgage quote, it generally shows the rate and points (additional charges) that apply to borrowers that are closing on their loans at that particular moment. But since you almost certainly won't close your loan for a few weeks or months -- and because rates can fluctuate wildly during that time -- it is usually a good idea to "lock in" a favorable rate.
What this means is that, for as long as your lender's rate lock lasts (and they're usually time-limited), you can rely on the calculations you've made about whether you can afford the monthly payments for your new home or refinance. And that's very advantageous, especially if you are already at the limits of qualifying for your new loan because the amount you can afford to borrow is partially determined by the interest rate.
During periods where the current mortgage rate doesn't rise or fall appreciably, the primary point of locking in a rate is not to save money, but to give you certainty. That may be why, when The New York Times covered this topic last April, it headlined its piece, "Locking in Peace of Mind." You can potentially save thousands of dollars over the life of your loan if rates are rising when your lender gives you a mortgage commitment. But if they suddenly fall instead, don't beat yourself up because nobody in the world can successfully predict short-term interest rate fluctuations.
The Federal Reserve's A Consumer's Guide to Mortgage Lock-Ins details a number of things to watch out for, including these eight:
Be clear what your agreement says, and good luck!