When Should You Lock In Your Mortgage Rate?
If you're buying a home or refinancing an existing loan, you have plenty of things to worry about – a change to your quoted interest rate doesn't have to be one of them.
With a mortgage rate lock, you can help ensure that you receive your quoted rate and payment when you make it to closing.
What Is a Mortgage Rate Lock?
A mortgage rate lock guarantees your rate as long as you close the loan before it expires.
Mortgage rates are constantly shifting. There's a good chance that the rate a lender quotes you today will differ from what they offer tomorrow.
This rate lock protects you from interest costs increasing between when you lock in your rate and when you close on your loan.
Without a lock, rising mortgage rates could leave you on the hook for a larger monthly payment than you anticipated. In some scenarios, this payment increase could require you to come up with more money down to remain eligible for the mortgage.
For example: You’re taking out a $350,000 30-year fixed-rate mortgage and have been quoted an interest rate of 6.5%. This loan's principal and interest (P&I) payments would be $2,212 per month.
If you didn’t have a lock on your mortgage and the rate rose to 7.0% at closing, your monthly P&I payment would be $2,329. You would wind up paying more than $40,000 in extra interest over the life of the loan.
An extra $117 per month could put you outside of qualifying range for the loan. At the very least, this could delay closing while you and your loan officer come up with a solution. At the worst, your mortgage could fall through altogether.
How Long Does a Mortgage Rate Lock Last?
You’re most likely to find lenders offering 30 or 45-day mortgage rate locks. These locks are designed to give homebuyers with a property under contract enough time for final approval to close their loan.
However, many lenders have begun "lock and shop" programs that allow you to keep your interest rate for longer without needing to have a property already selected. Some lock and shop lenders may permit you to hold onto your rate for up to an entire year, although 60 and 90-day extended locks are the most common.
The length of your mortgage rate lock is usually negotiable with your lender. Generally, a longer lock equates to a marginally higher interest rate.
When Should You Lock Your Mortgage Rate?
Mortgage rate locks are most often associated with buying a home. However, they can also come in handy if you're refinancing an existing loan. Choosing the right time to lock your rate can depend on your borrowing needs.
Purchasing a New Home
For most homebuyers, it’s wise to consider locking in your rate as soon as possible once you have a home under contract.
Rates have the potential to decrease before you get to closing. Still, it's usually better to have a monthly payment slightly above market than to have your costs rise because you didn't lock in your rate. Depending on your personal finances and the amount of the increase, failing to lock in your mortgage rate could put your entire purchase in jeopardy.
Plus, if rates do decrease, you may be able to "float down" to take advantage of the lower current rate. However, not all mortgage companies offer float downs, and many who do will only allow it for a fee. Make sure to ask your lender about its policy.
One more piece of advice: Be sure you lock in your rate for long enough to make it to the closing table. If you anticipate a 25-30 day close, you'll likely want to opt for a 45-day lock to account for any last-minute surprises.
Refinancing Your Current Home
You have much greater control over when you lock in your mortgage rate if you're refinancing an existing loan. Since you don't have a purchase agreement dictating the timeline, you have more room to watch how interest rates are trending.
If rates go up, you don’t have to worry about missing out on your dream home. You simply keep your current mortgage and don’t go through with the refinance until rates come back down.
This gives you the freedom to watch, wait, and lock in your new mortgage whenever you're happy with the currently offered rate. Sometimes, you can even predict when rates are likely to change.
Rates often move in tandem with the release of the Employment Situation Summary – often referred to as the jobs report – by the U.S. Bureau of Labor Statistics on the first Friday of every month. The Consumer Price Index, commonly released during the second week of the month, is another big report with the potential to swing mortgage rates (for better or for worse).
If you're refinancing and don't have the time or energy to track interest rate trends, consult your loan officer for guidance. These mortgage professionals see rate changes daily and can offer insight into how the mortgage market is presently moving.
What Happens if a Mortgage Rate Lock Expires Before Closing?
Sometimes, it can take longer to close on a home than planned. Many problems can arise, both related and unrelated to the lending process. If you cannot close on your loan before your mortgage rate lock expires, you'll have two options: accept the current interest rate and new monthly payment or ask for a rate lock extension.
Lenders will typically allow you to extend your rate lock, but you should plan on having to pay for it. This extension fee is generally assessed as a percentage of your total loan amount.
Costs and extension lengths will vary by company. However, it’s not uncommon for lenders to charge a mortgage rate lock extension fee of around 0.25% for a 10 to 14-day extension. With a $350,000 loan, for example, this would be a cost of $875.
In most cases, it makes more sense to select a longer upfront mortgage rate lock to give yourself a little wiggle room in the event that your closing date gets pushed further out.
Locked-In Mortgage Rates Can Still Change
When you lock in your mortgage rate, you’re protecting yourself against fluctuations in the mortgage market. If overall rates rise before you close on your loan, you’re locked into the lower amount with the agreed-upon payments.
However, there are some situations where the rate you have locked in could still change:
There is a noteworthy event on your credit, such as taking out an auto loan or newly reported late payments
The home appraisal comes in different from what you expected
You wind up with less money for your down payment than you planned
You need to change your loan type, such as from a conventional mortgage to an FHA loan
In these cases, you still get the day’s rate when you lock it in, but that day’s rate will be re-priced based on new criteria.
Frequently Asked Questions About Mortgage Rate Locks
Do you still have questions about mortgage rate locks or when you should consider locking in your rate? Here are a few answers to some commonly asked queries.
What Happens if You Lock In a Mortgage Rate and Rates Go Down?
In most cases, you're going to still pay the same rate that you locked into. While a mortgage rate lock protects you if rates go up, it similarly protects the lender if rates go down. Your lender may allow you to "float down" to the current lower rate, although many companies charge a fee for this privilege.
How Far Ahead Can You Lock In a Mortgage Rate?
Most lenders will let you lock in your mortgage rate for 30 or 45 days once you have a property under contract. However, many mortgage companies are beginning to offer "lock and shop" programs, which allow you to lock in a mortgage rate for 90 or 120 days, sometimes even longer.
Can You Walk Away From a Mortgage Rate Lock?
Yes. Getting a mortgage rate lock does not obligate you to take out a mortgage. You can walk away if you choose, although that may not be practical if you are in the process of closing on a home. Even still, you'll be out any application or appraisal fees you've already paid.
Your best option is to find a lender who offers a float-down with their rate lock. This would allow you to take the lower rate rather than walk away from the loan altogether.
Is It the Right Time for a Mortgage Rate Lock?
If you're purchasing a home and already have a property under contract, it may be time to get serious about locking in your interest rate. However, even borrowers just starting their home search may be eligible for a mortgage rate lock under one of the "lock and shop" programs.
Just remember, though: being locked into an interest rate doesn't mean you necessarily have to use that company if other better options are available. Check out today’s best rates to see what lenders currently offer in your area.
