Picture this: You’re all set up with a great rate on your mortgage, ready to close on your dream home with a nice, low monthly payment – only to find out that the rate you’d been banking on has gone up. That's likely to put a damper on your home buying excitement.
Luckily, there's a way to avoid the stress of changing rates. Here’s what you need to know about mortgage rate locks.
What Is A Mortgage Rate Lock?
A mortgage rate lock is an agreement between borrower and lender that allows borrowers to lock in an interest rate. If you’re looking to borrow, it's a guarantee that the rate you’re given for your loan will stay the same until closing, regardless of market movement.
Mortgage rates change a lot – they move up and down from day to day and even hour to hour. Because of this, the rate you’re given when you first apply for a mortgage might not be the going rate when it's time to close.
A rate lock provides security. While you may not end up getting the best rate possible, locking in your rate can provide the peace of mind that you won’t end up with a higher rate.
How Does A Mortgage Rate Lock Work?
What does a rate lock do for you? Here's how it works in practice.
If Rates Go Up
You lock in your rate as soon as possible, and by the time closing comes, rates have risen significantly. Since you've already locked in, those spikes won't affect you at all. This is exactly what rate locks are for, so if rates rise, you win.
If Rates Go Down
Not being able to take advantage of falling rates is probably the one true drawback of the rate lock. If you're locked in and rates fall, you'll be stuck paying the higher rate.
If Rates Don't Change
Sometimes, you might lock in at an acceptable rate only to see them settle down at closing in exactly the same place you locked in at. This might feel frustrating if you paid a fee, but there's no surefire way to predict what the market will do. Think of rate lock fees as an investment in your peace of mind.
How To Get A Mortgage Rate Lock
Your mortgage rate affects your monthly payments, so it’s important to find the lowest rate and hang onto it. A difference of even a fraction of a percentage point can affect how much you end up paying over the life of the loan. Here's how to lock in your rate.
Get To The Right Point In The Process
Make sure you know when in the home buying process to expect the rate lock to come into play. You'll lock your mortgage rate at the time you get your loan offer. For a home purchase, it’s usually when a purchase agreement has been signed. For a refinance, it’s usually when you are submitting your documentation for loan approval.
The point of the lock is to protect you during the period between when you agree to a loan's terms and when your lender is ready to officially close on it. Once you've gotten your loan approval, that's the time to lock.
Be Aware Of How Much Locking Costs
Fees vary from lender to lender, but there's often a cost involved in locking your rate. This helps lenders stay in business if borrowers secure low rates right before a market shift. This fee might already be included in your interest rate, so if you're curious about what you're paying for your lock-in, you should contact your lender to get the details.
How much does a mortgage rate lock cost? For a short-term loan, you might end up paying somewhere between 0.25% – 0.5% of your loan to lock in your rate. If you end up extending your rate lock, you'll likely need to pay more on top of what you've already spent.
Make A Rate Lock Agreement
When it's time, your lender will likely ask you if you'd like to lock your rate. If they don't, take it upon yourself to ask. They'll explain the terms of the agreement with you and you'll move on in the home buying process while they finalize your loan.
Know How Long Your Rate Lock Lasts
Rate locks are usually good for 30 – 60 days. Depending on your lender, you may have to pay to extend the period beyond that.
You should be mindful of how long you think it will take you to close when you lock your rate. Your lender will be able to provide a reliable estimate for this. If you only have a lock period of 30 days and you anticipate the closing process will take longer, you should talk to your lender about extension options.
Ask Your Lender About An Extension
You might not be able to control whether you can close on a home before your rate lock expires. A successfully processed mortgage requires timely coordination of multiple parties, and sometimes the process hits speed bumps.
When your lock period expires, you’ll likely have one of two options:
- Pay to extend your period
- Accept the current rate
Talk to your lender in advance about policies regarding lock expirations. If you need an extension, ask for it. The lender may charge you, but the extra cost can be worth it if it means keeping your monthly payments low. You can give yourself the best shot at not needing an extension by sending in all the necessary forms and paperwork in a timely manner.
Understand That Rates May Drop
When you lock in your rate, you should be prepared for the possibility that rates will drop. This is just another reality of the process, and it shouldn't necessarily change your plans to close on your mortgage. Still, borrowers often wonder what to do if they really feel they're missing out on a great rate.
Your options vary depending on your rate lock agreement. In some cases, you may be able to withdraw and reapply for your loan, but this will significantly delay your buying process.
The best advice we can give you? Talk to your lender. Losing a borrower between a loan offer and closing is known as fallout risk, and lenders will usually work with you to prevent that from happening.
Alternatives To Locking Your Rate
If you're interested in protecting yourself against higher rates, a rate lock is the way to go. But there's always the chance that rates might drop before you close. If you're not ready to walk away from that chance, there are some alternatives to locking your rate. Let’s look at those.
Floating Your Rate
Floating your rate is the opposite of locking it. Rather than freezing the rate where it is, you decide to take the risk and let your rate fluctuate with the market. If rates go up, you won't be protected, but you do have the potential to luck out and get a lower rate.
The Float-Down Option
A float-down option helps mitigate a major drawback of the mortgage rate lock. Normally, if you lock in your rate and interest rates go down, you won’t get the lower rate. A float-down option takes away that risk. If rates go down, you'll get to drop down with them, while still being protected from rate increases.
The drawback? As a best-of-both-worlds option, a float-down typically costs extra on top of your rate lock. Depending on the market, though, this could end up saving you money in the long run. At the very least, it could save you some peace of mind if you're not sure whether you want to float or lock.
It's important to note that your initial mortgage rate isn't the be-all-end-all. If you want to be safe and lock in, you can always refinance down the line if rates drop significantly.
When To Lock In Your Mortgage Rate
If you’ve received a rate you’re comfortable with and know you can afford, your best bet is to lock it in.
You might be tempted to wait it out, float your rate and see if you can get a lower rate before locking in. However, the risk that comes with that likely won’t be worth the potential savings. If you want to take this route, you'll need to check mortgage rates regularly and be ready to move quickly. You should also check with your lender to see if you have a deadline for locking in.
How do you decide whether to lock or float? The safest bet is usually to lock, but if you really want to take the risk, the best time to float is typically when rates are falling.
Should You Lock Your Mortgage Rate?
When in doubt, the answer is yes, you should lock your mortgage rate. Still not sure? Try weighing the pros and cons.
Mortgage rate locks may:
- Protect you from rising interest rates
- Include a float-down option
- Give you peace of mind
- Take another task off your home buying to-do list
- Be altered with a refinance later
On the negative side, mortgage rate locks might also:
- Lock you out of falling interest rates
- Come with a fee
- Cost more with a float-down option
The Bottom Line: Locking Is Usually The Right Move
Is locking your rate worth it? It can be, depending on the cost and what rates are doing.
Talk to your lender and find out exactly what their rate lock policy is. Ask what it would cost to extend the period and what would happen if you face delays and your rate lock expires. If you’re interested, ask about float-down options.
In general, the security of protecting yourself from any rate spikes will be worth it. It’s hard to time the market to perfectly suit your needs. Turning your mortgage process into a game of trying to get the lowest possible rate is risky, and you could end up losing a comfortable rate.
When you’re ready to begin, you can start your mortgage application online.