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The math on mortgage interest rates can be tricky to navigate. That’s because rates can fluctuate from day to day based on various factors affecting the lending market.
If you seek to fund a home purchase or want to refinance your existing mortgage loan, the rate you are quoted today may go up between now and the time you close, increasing your borrowing costs and future monthly mortgage payments.
But what if there was a way to freeze a preferred rate and prevent it from going any higher? There is, and it’s called a mortgage rate lock.
Take the time to better understand how mortgage rate locks work, who should pursue them, the pluses and minuses of locking in a rate, ideal timing for a rate lock, and the steps involved by reading this article.
Mortgage rate locks explained
A mortgage rate lock is an agreement between you and your lender that guarantees your interest rate for a specific window of time – usually 30, 45, 60, or 90 days. Over this agreed-upon period, your interest rate will not change, even if market rates increase over that time.
“A rate lock allows a borrower to freeze their lender’s offer, thereby locking in the interest rate at which they will pay back their loan,” says Joshua Surver, a Realtor with eXp and lender with Zap Mortgage in Colorado Springs, Colorado. “After locking, lenders are required to honor their commitment for that agreed-upon period.”
You are typically allowed to lock in your rate any time after you have submitted a mortgage loan application. But every lender has its own rules and stipulations regarding rate locks, the experts note. If you opt for a rate lock, you need to make sure your lock agreement is long enough to cover the time until your loan closing date.
Rate locks are often provided for no charge by many lenders up to a particular deadline, although they commonly make up for this by charging you a slightly higher rate – typically between 0.25% and 0.5% of your loan.
Other lenders charge an upfront fee or an even higher rate surcharge. You may be allowed to extend your lock past your lock deadline if you agree to an additional fee or a slightly higher rate.
The float-down option
Worried that, after you lock in a particular rate, mortgage rates will drop, leading to rate lock remorse? You can opt for what’s called a “float down” to protect against this possibility.
“A float down is an option that allows you to lock in your mortgage rate for a certain period but then float your rate down if market interest rates fall before you close on your loan,” personal finance expert Andrew Lokenauth, publisher of TheFinanceNewsletter.com, explains. “ This can be a good option if you are planning to close on your loan in the future and you think that rates are likely to fall.”
The downsides of choosing a float down are that the lender will charge a separate fee and you will likely only be allowed to use the float-down option once with that lender.
» MORE: See today’s refinance rates
Good candidates for a rate lock
Pulling the trigger on a rate lock can be a smart move if you fit the right criteria. It’s best for those planning to close on a home within the next 30 to 90 days, as locking your rate will safeguard you from rising interest rates in the near future.
“A rate lock is also best for those who are fortunate to be in a low-interest rate climate. If you can lock in a very low interest rate, it may be worth paying for a lock fee or slightly higher rate to ensure you get that mortgage rate,” adds Lokenauth.
Those who are prepared to move forward quickly with a home purchase or refi and shoppers on a tight budget should also ponder a lock.
“This will ensure that market forces won’t further restrict your budget while you are house-hunting,” Surver continues.
Additionally, if you worry about interest rates rising in the weeks and days before you close, locking in a more preferred rate can provide valuable peace of mind.
Summing up the pros and cons
To review, locking in a rate with your lender offers the following advantages:
- It can protect you from the possibility of mortgage rates rising between the time you apply for a loan and when you close.
- It can offer peace of mind knowing that your rate will not change.
- It can help you anticipate your future monthly mortgage payments and budget accordingly.
Among the drawbacks of a rate lock are the following:
- You’ll pay more in total financing costs when you lock in a rate if the lender charges a fee or a slightly higher mortgage rate in exchange for the lock.
- If you don’t opt for a float down and you close on your mortgage loan after the lock period expires, rates may rise and you could pay a higher rate.
- You may have to pay an increased rate or a higher fee the longer your lock period is.
The best time to do a rate lock
While there is no “perfect time” when you should lock in a mortgage rate, the pros recommend carefully considering how long it might take you to shop for a home and close on your loan.
“The best time to do a mortgage rate lock is when you are ready to start the home buying process or refinance and you are confident you will be able to close on your loan within the next 30 to 90 days. If you are not sure when you will be ready to close on your loan, it may be better to wait before locking in your rate,” advises Lokenauth.
“Rate locks are preferred when a borrower believes rates will increase in the future or would like more certainty in their budgets when shopping for a home or refinancing,” he says. “For best pricing, I suggest locking a rate at an interval dictated by your lender. Typical rate locks are 30 days long and occur after the borrower is under contract once they know when the closing date will be.”
Bart Waldon, managing partner at Land Boss in El Dorado Hills, California, is a proponent of locking in a rate as soon as you begin seriously shopping.
“If you are ready to act quickly, a rate lock can make the most sense, especially in volatile markets,” says Waldon.
Rate lock scenarios
Let’s say you are planning on purchasing a home for which you need to borrow $300,000. You’ve already been preapproved for a 30-year fixed-rate mortgage loan with an interest rate of 6%.
You aren’t sure when you will be able to close, but you believe it will be within the next 60 days. If you lock in your rate today (ideally with no fee charged by the lender), you’ll be shielded from rising interest rates.
“But let’s assume interest rates rise to 7% by the time you are ready to close on your home. If you had not locked in your rate, you would have had to pay an additional 1 percentage point on your mortgage interest each year over 30 years,” cautions Lokenauth.
This would cost you an extra $197 per month on your mortgage payment.
The rate lock process
Here’s what’s involved with getting a rate lock:
- Get pre-approved for a mortgage purchase or refinance loan. “This will give you an idea of what interest rate you qualify for and how much you can afford to borrow,” Lokenauth says.
- Shop around for a lender and compare rates, fees, and loan offers carefully so you can choose the best deal.
- Submit a loan application with your chosen lender.
- Lock in your rate. Secure your rate for a specific period of time, which protects you from rising interest rates.
- Close on your loan.
Alternatives to a rate lock
Instead of pursuing a mortgage rate lock for your refinance or purchase loan, you could explore a different worthy option if you fit the right profile: an adjustable-rate mortgage (ARM). Here, your mortgage loan has an initial fixed-rate period – often the first year to five years of the loan – during which your rate won’t change.
After this time expires, your rate can fluctuate, going up or down based on market rates/conditions. That means you may actually pay a lot more every month than if you had chosen a traditional fixed-rate mortgage loan.
“If you think rates will drop in the future but don’t know exactly when, it may be more beneficial to take advantage of an ARM than a rate lock,” says Surver.
Also, if you don’t plan to remain in your home for longer than the ARM’s initial fixed-rate period, it can make better financial sense to select an ARM.
Before locking in that rate
Eager to explore a rate lock? Before committing to this decision, it’s wise to weigh your options carefully.
“Borrowers should consider their lock decision with the understanding that they are executing a deal that may have a cost in the form of a fee or higher rate but only a possible benefit,” says Surver. “It all comes down to your confidence in how you assess future market conditions and your willingness to assume risk.”
Remember: The longer your lock period, the more you will likely pay in fees or a higher rate. There’s also the prospect of rates falling further after you lock in; without a float down in place, you may regret that rate lock.
“Lastly, if you think you may be moving or refinancing in the near future, you may not want to lock in your rate,” adds Lokenauth.