Mortgage rate lock: What it is and when you should use one

If you’ve been shopping around for a mortgage, you’ve already encountered one reality about interest rates: What you see today might be gone tomorrow. A mortgage rate lock ensures the rate on your mortgage stays the same, from the initial quote to closing. And you can still switch lenders once you’ve locked your rate. Here’s what you need to know about rate locks.

What is a mortgage rate lock?

“The mortgage market can be unpredictable, which is why a mortgage rate lock can be a smart choice,” says Bob Driscoll, senior vice president and director of residential lending at Rockland Trust Bank in Norwood, Massachusetts.

“It guarantees that your interest rate stays fixed for a set period, usually from the time you make an offer until closing, as long as there are no changes to your application.”

For example, if your lender locks in your rate at 6.68 percent for 45 days and rates jump toward 7 percent within that period, you’ll still get your loan at the lesser rate — assuming you close before the lock expires.

It’s typically up to you to seek the rate lock, and skipping one isn’t always a bad strategy, especially if interest rates are falling or low in general. It just depends on the market when you buy and your risk tolerance.

Why do mortgage rates fluctuate?

Many factors cause mortgage rates to fluctuate, including the current state of the economy, housing demand, financial markets and actions taken by the Federal Reserve:

• Mortgage demand: Rates tend to rise when there’s strong demand for homes. If demand slows, rates tend to drop to attract more homebuyers to the market.
• Economic changes: Rates also tend to increase when the economy does well and slump during downturns to encourage growth. Mortgage rates can react to volatility, as well. For example, they fell during the series of regional bank failures in early 2023.
• Federal Reserve: The central bank of the U.S. doesn’t directly set home loan rates, but when it raises or lowers its key borrowing rate, the mortgage market usually responds in kind. You’ll see this especially with adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs).
• Treasury bond yield: The 10-year Treasury, in particular, informs the movement of mortgage rates and the yields on mortgage-backed securities, which are packaged portfolios of hundreds of fixed-rate mortgages.

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 the address of a prospective home. Others might wait for the seller to accept the buyer’s offer.

If you lock in 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, consider waiting on the rate lock — you don’t want to feel rushed to find a place and close the loan.

How long can a rate be locked?

While 30-day and 60-day rate locks are the norm, you might be able to find longer options.

Of course, you’ll likely also pay a higher fee for a longer lock. In some cases, that can be easily justified. 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. In other cases, it might not be worthwhile.

Mortgage rate lock extensions

If you’re nearing the end of the mortgage rate lock period and need more time to close on your home, you can pay for a rate lock extension. The fee is typically a percentage of your loan amount, and the longer the extension, the more you’ll pay. It’s usually more efficient to pay for a longer rate lock upfront than to buy an extension later.

What if you lock your rate and rates decrease?

Depending on your lender’s policies, you might be able to secure the lower rate. Along with 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.

This seems like a win-win — your rate can only decrease — but there will be some fine print. For example, you’ll generally pay a fee for a float-down lock, so you’ll need to make sure that the potential savings are worth the expense. And lenders typically require rates to fall by a certain amount before activating the float-down option. If rates fall by a tiny amount, it might not be enough to decrease your locked rate.

How to lock in a mortgage rate

Before you get a rate lock, your lender will usually review your finances, including your:

• 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 financial records and reviewing your application, your lender can quote you a rate and any fees to lock it. If everything looks good to you, simply submit a request to lock in the rate.

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. The lock’s cost is often baked into the rate you’re offered. If your lender does charge for one, it will likely be — or be equal to — a quarter to half a percent of your loan amount.

However, lenders usually charge a fee for extending the rate lock period beyond the standard 30 or 60 days. Ask about what to expect if you need to extend the lock.

Should you lock in a mortgage rate?

Given the upward climb in mortgage rates over the past few years, a mortgage rate lock is often a smart choice.

Consider if you lock in a 7 percent 30-year rate for a $300,000 loan. At this rate, you’d pay $418,527 in total interest. Now, let’s say you don’t lock your rate and rates rise to 7.25 percent by the time you close. For the same mortgage, you’d pay $436,750 in interest — a difference of $18,223. With that said, don’t forget to consider the fees associated with locking your rate, if there are any.

You can use Bankrate’s mortgage calculators to get a sense of what you’d pay based on your rate lock.

FAQ

• What factors can cause a locked rate to change?

  A rate lock can give you peace of mind, but it’s not always set in stone. It could change for the following reasons:

  • • Your credit profile or score changed (such as from opening a new credit card).

  • • The lender was unable to verify and properly document your income.

  • • You decided on a different type of loan or loan amount.

  • • The home appraisal came in lower or higher than anticipated.

  Before locking in your rate, review the agreement to understand what events would cause a change.

• 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 switch to that lender after your rate lock with the first lender begins.

• Does the loan type affect the mortgage rate lock?

  You can lock any type of mortgage or refinance rate.

• What happens if the rate lock expires before closing?

  Real estate transactions don’t always close on time. If your rate lock expires before you receive the keys, don’t panic just yet. Your mortgage lender might offer to extend the lock, either free or for a fee.

  That rate lock 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.