Mortgage Rate Lock
What it is:
How it works/Example:
When a mortgage originator finds a competitive rate for a borrower, the rate is based on current interest rates. If the borrower decides to formally apply for the loan, the originator uses a mortgage rate lock to freeze the interest rate until the borrower has completed the mortgage application and been approved for the mortgage.
A mortgage rate lock stipulates that the borrower must repay the mortgage at the locked-in interest rate and that the lender must lend at the locked-in interest rate.
For example, let's assume that John's mortgage has a mortgage rate lock of 3.5%. Under the terms of the mortgage, John has agreed to pay the mortgage at this rate until all the principal and interest has been repaid. Likewise, the lender agrees to charge John exactly 3.5% -- no more and no less -- until the loan is completely paid off.
Why it matters:
Prevailing interest rates fluctuate frequently. A mortgage rate lock protects the borrower in the event that interest rates go up. Likewise, a mortgage rate lock protects the lender in the even that interest rates go down.