As a homebuyer, you always want the lowest possible interest rate on your mortgage — and with good reason, too. Even a small rise in interest rates can cause you to pay more in costs over the life of your loan.
But rates fluctuate daily — even by the hour — so it’s a good idea to lock in your mortgage rate when you have a good one. Generally, you want to lock in when you’re comfortable with the rate and the monthly payment.
What is a mortgage rate lock?
A mortgage rate lock is a guarantee from your lender that your interest rate won’t rise for a specified period of time. If the closing on your mortgage loan or mortgage refinance is delayed, however, you might have to ask for a lock extension which could wind up costing you a fee.
Rate locks protect you from market fluctuations. As your lender underwrites and processes the loan over a period of several weeks, rates can move up or down. If you lock the rate and market interest rates increase, you still get to keep your lower rate. But you could lose out if you lock a rate and interest rates fall — unless your lender offers a “float down” option.
Keep Reading: 11 Steps to Getting the Best Mortgage Refinance Rates
How a rate lock works
Three main scenarios can happen once you lock in a mortgage rate.
If interest rates go up
If interest rates go up after you’ve locked in, this is a win for you since the mortgage rate lock protects you against rate increases. So if rates rise while your loan is still in process, the lender won’t increase your interest rate and you get to keep the lower rate.
If interest rates go down
If interest rates go down after you lock in, that’s not ideal because you’re bound to the rate your lender locked for you. However, if you want to take advantage of lower rates after you lock, you can ask your lender if it offers a “float down” option. This allows you to score a lower rate if they drop before closing.
If interest rates stay the same
If interest rates stay the same after you lock, then you’d still have the interest rate you locked. Though you might feel like you wasted money on the mortgage rate lock, your monthly mortgage payment won’t increase.
Keep in mind:
No one can predict what rates will do. They can move up or down a few basis points, then settle right where they were when you started the process.
How to lock in a mortgage rate
Knowing when to lock in your mortgage can be tricky, but the actual process for locking is pretty simple. Here’s how:
- Ask about time frames. Your lender can tell you when it’s possible to lock the rate — usually, it’s once you submit your application — and whether you may use a float-down option.
- Ask about costs. Also, ask whether the lender charges a fee to lock the rate — or extend the lock if needed. You should know if fees are refundable if you cancel the mortgage application.
- Determine your lock timeline. The closing date, usually set once you sign the purchase agreement on a purchase loan, can help you figure out your timeline. Your rate lock agreement should extend until you close on the home, but you might want to add a few days as a buffer.
- Monitor mortgage rates. This gives you an idea of where rates are headed. Your real estate agent and loan officer can give you their guess as to whether they’ll rise or fall, but the decision of when to lock is yours.
- Make the call. Generally, buyers ask for a rate lock when rates are rising. If rates are dropping, then you might decide not to lock the rate.
- Ask for a rate lock. Contact your lender or broker and ask for the rate lock. Provide a time frame, too.
- Review your new Loan Estimate. Your lender’s new Loan Estimate should clearly say the interest rate can’t increase unless the rate lock expires.
Find Out: How to Buy a House: Step-by-Step Guide
Why it makes sense to lock in a mortgage rate
Locking down your interest rate can give you peace of mind and help you budget your monthly mortgage payment. Skipping the rate lock is a gamble. If rates creep higher while your loan is still in process, your monthly payment can increase and might impact your loan qualification. You could also pay thousands more over the life of a loan.
Let’s say you’re buying a home for $350,000 with a 15-year mortgage, a 3% fixed APR, and a 20% down payment. Just a 0.5% rise in interest rates will drive up your monthly mortgage payments by $68. If you stay in your home for 15 years, that adds up to more than $12,000. Compare that to a 0.25% fee to lock the 3% rate, which would equal just $875.
Tip:
Keep in mind that a locked rate can change in some cases. For instance, if your credit score changes, the home appraisal doesn’t match the loan amount, or you lose your job — the interest rate can increase or decrease.
Learn More: How Much Does It Cost to Buy a Home?
Frequently asked questions
When is the best time to lock in a mortgage rate?
Between getting a mortgage pre-approval and submitting your mortgage application, monitor mortgage rates in your area.
Ask your real estate agent and loan adviser for their input, too. If rates are trending upward, it might be a good idea to lock your rate as soon as it’s offered. If rates are dropping, then you might decide not to use the lock at all.
Learn More: How to Apply for a Mortgage
How long can you lock in a mortgage rate?
Depending on the lender, you can usually lock in the rate for 30, 45, or 60 days — sometimes longer. You should choose a time frame that’s long enough to allow for underwriting, closing, and any contingencies. Beyond that time frame, you might have to pay a higher fee to extend the lock — typically, the longer the lock-in period, the higher the fee.
Find Out: How Long It Takes to Buy a House
How much does a mortgage rate lock cost?
Some lenders charge a separate fee for a rate lock. This fee varies and can be expressed as a dollar amount, such as $1,000, or as a percentage of the loan amount, such as 0.25% of the total loan value.
Other lenders might not charge a fee for a rate lock, but this usually just means it’s included in the rate you’re offered.
What happens if the rate lock expires before closing?
If your rate expires, you could be subject to a higher rate. Sometimes that includes an additional fee you might have to pay to lock in your rate again. So, you’d want to pay to have your rate extended in most cases before it expires.
What is a float-down lock?
The float-down option allows you to lift the rate lock if rates fall. Not all lenders offer this, but it’s always a good idea to ask your lender if they do.
How long can you get a float down rate for?
Some lenders allow you to float down the rate until closing, while others set limits. For example, you might be able to request a lower rate just once after asking for a rate lock. But always check with the lender, and ask whether they charge a fee.
