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If you’ve been comparing mortgage rates, you’ve already encountered one reality about the process of buying a home or refinancing: What you see today might be gone tomorrow. While interest rates change all the time, a mortgage rate lock ensures the rate on your mortgage stays the same, from the initial quote to closing. Consider these key points about rate locks, and how you can use a lock to your advantage.
What is a rate lock?
A rate lock is a guarantee that a mortgage lender will honor a specific interest rate at a specific cost for a set period.
The benefit of a mortgage rate lock is that it protects you from market fluctuations. For example, if your lender locks in your rate at 5.68 percent for 45 days and rates jump up toward 6 percent within that period, you’ll still get your loan at the lesser rate.
“Mortgage interest [rates] can change every day and sometimes even multiple times a day, so we always recommend that borrowers lock in their rate,” says Richard Greene, branch manager and loan officer at New Mexico Mortgage Company in Albuquerque.
It’s up to you to seek the rate lock. If you choose not to do so, and you have no rate lock, this is known as “floating” a rate. That’s not always a bad strategy — when interest rates are falling in general, you would want to take advantage of this favorable movement in the market. (The float is typically 30 days to 60 days, but it might be longer if you’re willing to pay more in fees to get it.)
However, failing to lock your rate can be costly in a rising-rate environment, like we’ve experienced for most of 2022 so far.
When can a mortgage rate be locked?
It depends on the mortgage lender. Some lenders offer a mortgage rate lock once the borrower is preapproved with just an address of a prospective home. Others might wait for the seller to accept the buyer’s offer.
If you lock too early, however, you might end up exceeding the expiration date and facing extension fees or a new rate. So, if you’re just starting to look at properties, it might not be wise to opt for a rate lock just yet — you’ll want to avoid feeling rushed to find a place and close the loan.
Also, keep in mind that the lender can void a rate lock if certain items on your credit report or mortgage application change between the time of your agreement and final underwriting.
The sweet spot is the optimal combination of the interest rate, term and costs. Most lenders won’t lock your rate for less than 30 days unless you’re ready to close, and often offer the same rate for a 15-day and 45-day period. Ask about the rates for several lock periods: 30, 45 or 60 days. Any term longer than 60 days gets pricey, so it might be smarter to wait until you get closer to the closing and check again.
How long can a rate be locked?
The answer depends on your mortgage lender. While 30-day and 60-day rate locks are the norm, you might be able to find significantly longer options that stretch closer to a full year.
Of course, you might have to pay a higher fee for a longer lock. In some cases, that can be an easily justified cost, though. For borrowers of construction loans, for instance, paying for an eight-month rate lock might save them money in the long run, especially as interest rates rise.
What happens if the rate lock expires before closing?
Real estate transactions don’t always close on time. If your rate lock expires before the keys are yours, don’t panic just yet — your mortgage lender might offer to extend the rate lock, either free or for a fee.
That extension fee might not be your responsibility, either. Depending on who’s to blame for the loan failing to close on time, the lender might cover or pay a portion of the cost.
If your lender won’t extend the rate lock, the combination of rate and points you locked in might no longer be available. In that event, the loan would be based on the new prevailing rate. As many borrowers have seen this year, this might push your mortgage payments into unaffordable territory.
How much does a rate lock cost?
Rate locks aren’t free, but that doesn’t mean you’ll necessarily see a line-item charge for them. Most lenders do not charge a separate fee for rate locks within a certain period of time; the cost of the lock is often baked into the rate you’re offered.
Lenders usually charge an additional fee for extending the term of the rate lock period, however, so ask about what to expect if you need to extend the lock.
“Typically, an extension costs 0.375 percent of the loan amount,” says Greene. “If the loan is $100,000, then a 15-day extension would cost $375 — and then you can extend again. If rates have gone up, it might be cheaper to pay the extension fee upfront.”
Find out when your loan is expected to close and work backward to determine when to lock the rate. Try to give yourself some cushion: If you think you need 45 days to close your loan, find out what the interest rate and cost would be if you locked it for a 60-day period.
What is a float-down lock?
In addition to a standard rate lock on a mortgage, some lenders offer a float-down lock, which is designed to help you take advantage of lower rates if they become available before you close the loan. Float-down locks come with a win-win: You get the assurance of your rate now, plus a lack of regret if that rate drops.
However, there might be fees associated with this option, so you’ll need to make sure that the potential savings are worth any additional expense.
Even if there aren’t extra fees, there will be some fine print to consider. For example, if rates fall by a tiny amount, it might not be enough to actually put the float-down policy in action. Check the details to understand the threshold that rates must cross in order to exercise the float-down capability.
How to lock in a mortgage rate
You won’t get the opportunity to lock your mortgage rate until your lender has at least had a chance to do a preliminary review of your finances. Your lender will likely need some or all of the following documents beforehand:
- Credit report
- Social Security Number verification (a form you sign)
- Last two months of bank statements
- Last two months of investment account statements
- Last one to two years of tax returns
- Last one to two years of tax forms like W-2s, 1099s, etc.
- Past 30 days of pay stubs
- Identity verification (for example, a driver’s license or passport)
After verifying your credit score and getting a sense of how much you plan to put down and other factors, your lender will be able to give you a quote for your rate. At this point, it’s wise to ask for details on its rate-lock policy. If things look good to you, simply submit a request to lock in the rate.
Can you change mortgage lenders after locking your rate?
A rate lock doesn’t lock you into the deal — if you find better terms and lower closing costs from another lender, you can opt to go with that lender after your rate lock with the first lender begins.
However, consider the implications of changing lenders at this stage. Think about all the work you’ve done with the initial lender so far, and any money you might have already paid for an appraisal, a credit check or other fees. If you switch lenders now, you’ll need to do all of that again, which might not be worth the hassle or time.
Should you get a mortgage rate lock?
Given how quickly current mortgage rates have climbed this year, locking in your rate can pay off.
Consider if you lock in a 6.74 percent rate on a 30-year loan for $240,000. At this rate, you’d pay $319,847 in total interest.
Now, let’s say you don’t lock your rate and rates rise to 6.99 percent by the time you close. For the same mortgage, you’d pay $334,339 in interest — a difference of $14,492.
You can use Bankrate’s mortgage calculators to get a sense of what you’d pay based on your rate lock.
If you plan to refinance now, it’s best to lock your rate since rates are rising. Consider, though, whether refinancing at this point makes the most financial sense. Unless you got your mortgage more than 12 years ago, you likely already have a low rate compared to what’s available today.