Typically when you apply for a mortgage loan, you have the choice to lock the rate or float the rate. If you lock the rate, the lender will guarantee the rate for a set # of days (15, 30, 45 or 60 days typically). Generally, the shorter the rate lock term the better the rate. If you lock the rate, this is the rate you will get whether rates go up or down. If you do not lock the rate then your rate is floating. This means that at some point in the future (prior to closing) the rate will need to be locked. At the time you lock the rate in the future (if your rate is floating) you will get the rate that is available on that day. If rates are higher than they were when you started the process and you have been floating you will have to take a higher rate if that is what is available on the day you decide to lock the rate. On the other hand if you are floating and rates go down, you win!
The bottom line is that even the most educated economist cannot predict what will happen with rates. When my customers are considering a rate lock, I ask them this: Which of these two scenarios is more painful to you: 1) you lock the rate and rates go down and you could have gotten a better rate if you had not locked 2) you floated the rate and rates went up and now you are stuck with a higher rate (and payment). My personal feeling is that if you are happy with the terms, lock the rate and don’t worry about it.
When locking a rate, always give yourself enough time to close within the rate lock period!