What is a Mortgage Rate Lock?

Mortgage Rate Locks: A Guide to Securing Your Interest Rate

If you’re in the middle of the home loan process, you’ve likely noticed that interest rates can fluctuate frequently. The rate you see in your initial mortgage quote may not be what your lender offers at closing. While this can be frustrating, mortgage rate locks provide a way for homebuyers to secure a specific rate for a set period, protecting themselves from these fluctuations.

In this guide, we’ll explore everything you need to know about mortgage rate locks, including when and how long you can lock in a rate. We’ll also walk you through the essential steps to take if you decide a rate lock is right for you.

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What Is a Mortgage Rate Lock Period?

A rate lock is a commitment from a mortgage lender to offer you a specific interest rate for a set period if you close within a particular timeframe.

Because mortgage interest rates can change daily, sometimes even multiple times within a day, a rate lock helps homeowners avoid the stress of unpredictable rate hikes. For example, if you lock in a 6.25 percent mortgage rate for 30 days and the rate jumps to 7.50 percent the next day, you’ll still close on your loan at the lower 6.25 percent.

It’s up to you to request a rate lock from your lender. If you don’t, your current rate will “float” and be subject to market changes, which could work in your favor or against you depending on market conditions. Some lenders also offer a “float-down” option, allowing you to benefit from lower rates if they drop after you’ve locked in.

While rate locks protect you from market fluctuations, your mortgage rate may still change if your financial situation shifts. Changes in your credit profile, the home’s appraisal value, or adjustments to your loan amount or type can impact your rate.

What Is a Float-Down Option?

A float-down provision lets borrowers secure a lower interest rate when market rates become more favorable after they've locked in a higher rate. However, not all lenders offer this option during the mortgage process, and those that do may charge a fee, typically a percentage of the loan amount.

If you’re interested in a float-down option, make sure to ask your lender about it when securing your rate lock. The lender will determine how much rates must drop before you can exercise the float-down. For instance, if you lock in a 6.25 percent rate and your lender requires a 0.25 percent drop, you’ll need the rate to fall to 6.00 percent before you can lock in the lower rate.

What Causes Mortgage Rates to Change?

Mortgage rates fluctuate for various reasons, with the general state of the economy, Federal Reserve, and housing demand playing significant roles. Here are the most common factors affecting interest rates:

Economic trends: Rates tend to rise during strong economies and drop during downturns to stimulate growth.
Federal Reserve: While the U.S. Central Bank doesn’t directly set mortgage rates, it heavily influences them. When the Federal Reserve raises or lowers its key borrowing rate, mortgage rates often follow.
Housing demand: High demand for homes usually results in higher interest rates, while a dip in the market can lead to lower rates.

How to Lock in a Mortgage Rate

The process of locking in a mortgage rate can vary by lender, but it typically begins with submitting a rate lock request. The lender will then review your financial documents, which may include:

Credit report
Social Security Number verification
Bank statements
Investment account statements
Tax returns (e.g., W-2s, 1099s)
Pay stubs
Identity verification (e.g., driver’s license, passport)

After evaluating your financial history and credit score, your lender will provide a quote and inform you of any fees associated with locking in the rate. Once you agree to the terms, you can confirm your decision to lock in the rate.

When Can You Lock in a Mortgage Rate?

Some lenders allow rate locks as soon as you’re preapproved, while others may require you to wait until the seller accepts your offer. It’s essential to time your rate lock based on your expected closing date. Lock in too early, and you could face extension fees or end up with a different rate.

How Long Can You Lock in a Mortgage Rate?

Interest rate lock periods typically range from 30 to 60 days, but some lenders offer shorter or longer options, such as 15, 45, or even 120 days.

How Much Does a Mortgage Rate Lock Cost?

Lenders usually charge fees based on the length of the lock period. Longer rate locks tend to cost more, with fees generally ranging from 0.25% to 0.50% of your total loan amount. These fees are often built into the rate offered.

Can You Switch Lenders After Locking in a Rate?

Yes, you can switch lenders after locking in a rate, but remember that your mortgage interest rate lock is not transferable between lenders. If you decide to go with a new lender, you’ll need to apply for a new loan, which may involve additional fees and could result in a different interest rate.

It’s important to carefully weigh the pros and cons before making this decision. If you find a loan with better terms, lower closing costs, or a lower monthly mortgage payment, then this might be the right decision for you. However, switching lenders mid-process can also delay your home purchase and potentially lead to higher costs.

Securing Your Mortgage and Dream Home

Locking in a mortgage rate can offer peace of mind during the home-buying process, shielding you from unpredictable market fluctuations. By understanding how rate locks work, the factors that influence rates, and the options available, you can make informed decisions that align with your financial goals.

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Frequently Asked Questions (FAQ)

What factors can cause a locked mortgage rate to change?

Is it a good idea to lock in a mortgage rate?

It depends on your financial situation. Rate locks are beneficial because they protect you from rising rates. For example, if you lock in at 6.25% and the rate rises to 7.50%, you’ll still secure the lower locked-in rate.

What happens if my rate lock expires before closing?

If your rate lock expires before closing, don’t panic. Some lenders offer extensions, though you may need to pay an additional rate lock fee to secure your rate after the expiration date. While each lender offers different terms and conditions, rate lock extensions can get costly when they extend the rate lock for a long period of time.