A rate lock-in agreement with a mortgage lender allows you to secure an interest rate for a specified amount of time and cost. A rate lock commits the lender to honoring the rate at closing as long as it occurs before the lock expires. To a degree, it also commits the buyer to using that lender to close the loan. Borrowers can cancel a loan for a number of valid reasons; however, a borrower generally can't cancel a rate lock.
Lenders expect borrowers to follow through with a rate lock-in. They typically won't let you lock in a rate until you have met certain prerequisites in the loan process – usually an initial review of income, asset and credit history. At minimum, you must complete a loan application with the lender and provide a subject property as collateral to lock in a rate. Rate lock-ins allow the lender to estimate the number of closings and income it will generate in the coming weeks.
Rate locks typically last between 10 days and 60 days, although some lenders may offer them for as few as seven days and as long as 90 days. Borrowers choose a lock-in period based on how long they anticipate the loan process to take. Rate locks make the most sense when mortgage rates are on the rise. Borrowers also can let their rate "float" up or down with market fluctuations. This makes the most sense when a borrower is unsure of which loan program or lender to use or rates are on the decline and there is minimal fear of a higher rate at closing.
The lender or the borrower can cancel a loan agreement before closing. Lenders typically cancel because a borrower fails to meet guidelines due to changes in income or credit during the loan process. Borrowers can cancel if loan terms or conditions change and the borrower no longer wants to continue with the purchase or refinance before loan closing. However, you can't simply re-lock a rate or request a better interest rate or rate-lock cost if the lender's pricing changes once you're locked.
After you lock in a rate with a lender, you may cancel the transaction altogether and go with another lender who offers a better rate. Switching lenders after a rate-lock is generally frowned-upon by lenders, as it wastes the lender's time and resources; however, the practice is legal.
It also is usually expensive for the borrower because doing business with a new lender involves a new home appraisal and credit report. The borrower isn't entitled to a refund of the appraisal or other fees paid on a canceled loan. To benefit from falling interest rates without canceling and changing lenders, the borrower may allow a rate-lock to expire, instead.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.