What Is a Mortgage Rate Lock?

What Is a Mortgage Rate Lock?

A mortgage rate lock is an agreement between a borrower and a lender that freezes the offered mortgage interest rate for a specified period of time. For example, when you get preapproved for a mortgage, the lender may note on your loan estimate that your rate is locked until a certain date and time. Or you could lock in your rate closer to closing.

When you choose a mortgage rate lock, under most circumstances, the rate you've been offered won't change before you finalize your home purchase at closing. This can prevent a surprise jump in your offered rate, especially during periods when interest rates are rising.

Learn more: How to Get the Best Mortgage Rate

How Does a Mortgage Rate Lock Work?

When you're applying for a mortgage, the interest rate you qualify for can fluctuate daily, or even multiple times a day, based on the state of the market. A rate lock keeps your rate from going up before your loan is finalized.

You can typically lock in your rate for 30, 45 or 60 days. But your rate could still be altered, even if you opt for a rate lock, due to changes in your credit score, loan type, down payment or the home's appraisal value changes before closing. Your rate could also change if the lender isn't able to verify your stated income on your mortgage application.

Current mortgage rates are trending downward, though their future trajectory is as hard to predict as other economic trends. If rates continue to drop, you can ask your lender for a float-down option. This allows you to lock in your rate, avoiding a potential rate spike, while also giving you the option to get a lower rate if possible. This will likely cost a fee, potentially of 0.5% to 1% of the total loan amount.

Learn more: Compare Current Mortgage Rates

When Can You Lock In a Mortgage Rate?

The structure and timing of rate locks vary by mortgage lender. Some offer a rate lock with a loan estimate, which comes relatively early in the mortgage approval process. Another option is to lock in your rate once you've found a home, made an offer and are applying for a mortgage. In this case, a rate lock will protect you from rising rates between submitting your official mortgage application and closing.

It's important not to lock in your rate too early, since you may have to pay to extend it if your closing date is later than expected. Lenders may have policies on how early or late you can opt for a rate lock, such as up to five or 10 days before closing.

How Long Can You Lock In a Mortgage Rate?

Mortgage rate lock periods generally range from 30 to 60 days. Some lenders offer longer time frames, such as up to 120 days, but that may come with a fee or a slightly higher mortgage rate than you'd get otherwise. Some types of loans, such as construction loans for those building a house from scratch, have longer rate locks of up to 12 months.

Should You Lock In a Mortgage Rate?

It can be particularly wise to lock in a mortgage rate when:

• Interest rates are rising. Mortgage rates change regularly. If they're trending upward and they're likely to rise before closing, lock in your rate as early as possible.
• You've been offered a competitive rate. If you don't foresee that rates will go down in the next few months and you've been offered a rate that's lower than average, locking it in could save you money and give you peace of mind.
• You're already under contract on a home. It's common to lock in a rate once you've found a home to buy, made an offer and are under contract, and you're waiting for your loan to be processed. This timing helps ensure your rate lock will still be valid at closing.
• There's a low-cost float-down option through your lender. If your lender offers a rate lock with a float-down option, you can get the best of both worlds: protection from rising rates and the chance to take advantage of falling rates. Confirm how much your lender will charge you and if a lower rate would justify the extra cost.

How to Lock In a Mortgage Rate

To best make use of a mortgage rate lock, follow these guidelines:

• Improve your credit score. One of the best predictors of your mortgage rate is your credit score. You're likely to get a lower initial interest rate offer, and therefore a more worthwhile rate lock, the higher your score.
• Shop multiple lenders. Seek preapproval from a range of lenders and ask specifically about their interest rate lock policies, including their rate-lock periods, whether they provide a float-down option and how much it would cost to extend a rate lock if necessary.
• Monitor market trends. You'll have a better read on whether and when to lock in your rate when you follow trends that impact mortgage rates, such as economic growth, inflation and the Federal Reserve's monetary policy. A mortgage broker can help you understand in which direction rates are heading and whether to choose to lock yours in.
• Lock in at the right time. To avoid your rate lock expiring before closing, ask your lender about the current average processing time for a mortgage application. Make sure your lock-in period is long enough to account for that time, plus any common delays.
• Get your rate lock in writing. Ensure that your lender or mortgage broker agrees to lock in your rate in writing, not just orally. That way, you can hold them accountable for sticking to their promise.

Frequently Asked Questions

The Bottom Line

In many cases, locking in a mortgage rate can lead to long-term savings on a fixed-rate loan. But there are plenty of moving parts to consider: when to do it, how long it will last and how much it would cost if you pay for a float-down option or extension.

To get the best deal possible, compare offers from multiple lenders and ask detailed questions about their rate lock options. Shrewdly navigating the rate-lock process could lead to a meaningful difference in not only your interest rate, but your monthly mortgage payment and ongoing budget.