Anyone who's remotely followed mortgage market news in 2009 and 2010 knows that current mortgage rates have been at historic lows. This is a result of, among other factors, low-interest-rate policies pursued by the US government to stimulate housing market activity. You've probably also heard that low mortgage rates mean it's time to refinance or apply for a home purchase mortgage if you are in a position to do so.

When your mortgage is in process, you'll be asked about a mortgage rate lock. What does that mean, exactly? And how does today's mortgage rate environment affect your lock decision?

What is a rate lock?

A lock is a guarantee made by your mortgage lender that your mortgage rate, points, and terms will remain the same for a specific period. For example, say that you are offered a 5% refinance rate at zero points, for a period of 30 days. This means that your lender is guaranteeing the 5% rate and zero points for that 30-day period. Although you can also choose your lock term--which can range from 14 to 90 days or sometimes even longer--the most common lock term is 15 to 30 days, since this is also the average time for a loan to close.

What happens if you don't lock your loan?

If you don't lock your mortgage rate, your rate "floats" with the market's fluctuations. There is no guarantee whether or when interest rates will rise or fall, so floating your rate is essentially a gamble. If the rate goes down and you haven't locked, then you are fortunate. However, if the rate goes up, you are going to pay a higher rate and consequently a higher monthly payment. In the worst case, an upward adjustment in rates could endanger your loan, if you're already pushing the edges of the debt-to-income ratio requirements.

Some people want to wait for mortgage rates to go down rather than opt for the certainty of a locked interest rate that is offered in the market. This is especially true today, when home mortgage rates have dropped to record lows, and some believe that there's always the chance they will drop further.

Why might there be urgency now to lock my mortgage rate?

Of course, many people believe that historically low rates means that rates are more likely to rise than fall in the coming months. During the late 1970s and 1980s, average mortgage rates were into double digits. Today's best mortgage rates are in the 4% to 5% range, depending on the mortgage program you choose.

Nobody can predict in a volatile market whether interest rates will rise or fall; it's precisely because rate fluctuations are uncertain that a rate lock can be valuable.

Unless you have a large appetite for risk, most home buyers or homeowners would do well to go with a reasonable deal now rather than ride it out for the potential of some gain. If you're generally happy with a mortgage rate you are offered, locking means protecting yourself from an increase that may cost you money or even endanger your refinance or purchase.

If you decide to lock your rate, make sure that you get the written lock confirmation from the lender or broker before proceeding.

The original article can be found at MoneyRates.com:
Mortgage Rate Locks: Your Questions Answered