Mortgage Rate

Should You Lock in Your Mortgage Rate Today?

Mortgage interest rates are dynamic and unpredictable and can fluctuate many times between when you file a loan application and your closing. So, if you want to avoid uncertainty and preserve the rate in your mortgage loan offer, you might want to consider getting a mortgage interest rate lock. Interest rate locks can offer peace of mind to borrowers, but they are not foolproof—you could miss out on a lower interest rate after you lock and your loan might not close before the lock expires. Here, the ins and outs of a mortgage rate lock. 

What is a mortgage rate lock?

When you receive a mortgage loan offer, your lender usually will ask if you want to lock in the rate for a period of time or float the rate. If you lock in, the rate should be preserved as long as your loan closes before the lock expires. If you don’t lock in right away, a mortgage lender might give you a period of time (like 30 days) to request a lock, or you might be able to wait until just before closing on the home. 

What could happen if I fail to lock in my mortgage rate?

If you don’t lock in your mortgage rate, rising interest rates could force you to make a higher down payment or to pay points on your closing agreement. When you pay an upfront fee—or mortgage points—to your lender, you’re providing more money initially to get a lower interest rate.

For example, the cost for a $200,000 loan at a 30-year fixed rate could go up by more than $60 per month if the rate goes up from 5 percent to 5.5 percent, resulting in $22,000 more in interest during the loan term.

How does a mortgage rate lock work?

A mortgage rate lock can reduce financial uncertainty in the home purchase process because it protects you from major interest rate increases. Locks typically are in place for at least a month to give your lender enough time to process the loan. If your lender doesn’t process the loan before the rate lock expires, you’ll need to negotiate a lock extension or accept the current market rate. It’s possible that the market rate for your loan could fall below your locked-in rate, but you won’t be able to take advantage of the lower rate unless you have a “float down” option.

Even if you have a lock in place, your interest rate could change because of factors related to your application, including a new down payment amount; an appraisal on your home that is different from the estimated value in your application; a decrease in your credit score due to late payments or taking out an unrelated loan; and income on your application that can’t be verified. An interest rate lock agreement will include the rate, the type of loan (such as a 30-year, fixed-rate mortgage), the date the lock will expire and any points you might be paying toward the loan.

What do I do if interest rates drop after my rate lock?

If you locked in your rate early, but interest rates are dropping, you might consider withdrawing the current mortgage application and starting a new one. There are some risks to this approach, however. You could lose money you’ve already paid on an appraisal and other costs, such as a credit check, and end up paying for them again with a new loan application, or pay more for processing the new application if the lender or mortgage broker has higher fees.

You also could have to wait longer to close on your home, which could complicate your planned purchase if the seller needs the transaction to close on an exact date. (Note: This isn’t as much of a concern when refinancing.) If there is a big difference between your possible new rate and the current locked-in rate, however, it might be worth dropping the loan application and spending a few hundred dollars to obtain a rate that saves you thousands during the life of the loan.

When can I lock in my mortgage rate?

The most common time to lock in a mortgage rate is when you accept a loan offer. If you feel like you’ve received the best rate possible and fear a rate increase, lock it in now. But if you’re willing to gamble that the rate will drop in the coming days or weeks, your lender could let you wait and provide a lock-in at a later date. Make sure to ask your lender whether they will allow you to lock in at a later date and what restrictions might be tied to it.

How long does a rate lock period last?

Rate locks usually range from 30 to 60 days, and you need to take into consideration how long it takes to close a loan in your area when you discuss the length of the lock with your lender. For example, if your lender has a major backlog of mortgage applications because of historically low rates, get the longest length of time possible. When discussing the mortgage rate lock with your lender, also ask if they will prioritize the application for a new home mortgage purchase over a refinance. If so, make sure you get a lock period that’s long enough to cover your mortgage application process.

You need to do your part to move the mortgage application process along by quickly turning in documents requested by the lender, including bank account statements; proof of income; income tax returns; and photo ID. If you delay your response, you could cause the lock to expire before the home loan closes. If that’s the case, your lender might ask you to pay for a rate lock extension or split the costs. 

Should I use a mortgage rate “float down?”

A mortgage rate “float down” makes it more likely you will get the lowest interest rate before closing. If you’re locked in and the loan rate drops during the application process, a float down allows you to change to the lower rate. Ask your lender about this option before you lock in your rate, so you know the rules under which it would apply, as well as potential costs.

For instance, your lender’s policy might require that the rate drop by a certain percentage point before you can make a change, charge a fee for the move to the new rate and require that the loan be conditionally approved pending potential further documentation requests. A float down might be the best option if you have plenty of time before the loan closes and if the loan application is fairly straightforward.

How much does a rate lock cost?

You might get charged for a mortgage interest rate lock, but many lenders provide it for free. Charges could be the equivalent of a very small percentage of the loan—such as .025 percent, which can amount to several hundred dollars on a $300,000 mortgage loan—but that cost can be offset by savings across the life of a loan with a lower interest rate. Costs also can vary based on the length of the lock.

Mortgage rate lock pros

• If you like the rate you have, you can keep it unless your loan changes or the lock expires prior to closing.

• You don’t have to worry about changes to monthly payments because your interest rate is set.

• You can avoid a last-minute financial scramble before your closing if you need to provide a higher down payment or make a points purchase because of a higher interest rate.

Mortgage rate lock cons

• You could miss out on a lower interest rate, which could save you thousands of dollars during the life of the loan.

• If the rate lock expires, you might be charged hundreds of dollars to extend it or miss out on the rate altogether. 

Sign up to get “My Two Cents.” It’s a blog where I share my thoughts on everything related to real estate finance.