Interest rate lock is an option to lock in a quoted rate of interest for a specified period of time after the approval of a loan application. Without the protection of a rate lock the borrower is at the mercy of fluctuating interest rates; the rate that the borrower qualifies for is not guaranteed to be the final interest rate at loan closing. Using a lock-in, the quoted rate at loan approval will be the final rate at the closing table, thereby protecting the borrower against rising market rates. However, if rates should happen to fall between loan approval and closing, the borrower may not be able to take advantage of the lower cost.

In order to remain competitive in the marketplace, many lenders offer 30- to 45-day rate locks free of charge. If the loan will take a longer period of time to close, extended lock-ins are usually available for an additional fee. A float-down provision (which states that if rates fall before the loan closes the borrower will automatically receive the lower interest rate) may also be included for the sake of competitiveness. The borrower should ensure that his or her loan contains this provision.

If a rate lock isn't automatically included with the loan, there are a number of variables that the borrower should consider before deciding on whether to lock the interest rate. For instance, if the borrower doesn't lock and the rate increases, could he or she still qualify for the loan? Of course, in this circumstance, locking the rate would certainly be prudent.

The borrower should also consider if an extended lock-in would be necessary if the loan will take more than sixty days to close. What is the fee associated with this type of rate lock? When is it paid, is it refundable, and under what conditions?

Are interest rates fluctuating, or are they trending upward or downward? The borrower can check several sources before deciding if a lock-in is advisable. Financial indicators such as the federal discount rate (the rate at which banks borrow money from the Federal Reserve), the actions of the Federal Reserve Board (which tightens or loosens the money in circulation), and the ten-year treasury note market (which plays a large part in determining short-term interest rates) should be evaluated. They can be monitored through local newspapers or by online resources such as The Wall Street Journal and Interest.com. International events also play an increasing role in the volatility of U.S. interest rates, and neither should they be overlooked by the borrower. In fact, many lenders advise that if negative world news is occurring, it's probably wise to lock in the interest rate.