What Is A Mortgage Rate Lock And When Should You Use It?

A mortgage rate lock ensures that when applying for a mortgage, the interest rate you qualify for on your mortgage won’t change between when you get the rate lock and closing – provided your application doesn’t change and you close on the house within a specified time frame.

Interest rates constantly fluctuate. If rates are going up, a rate lock can potentially save you money on your monthly mortgage payment. But if rates go down, you’re typically stuck with the locked rate.

Read more below to learn about a mortgage rate lock and the best time to use it.

How A Mortgage Rate Lock Works

A mortgage rate lock allows you to hold a rate for your mortgage loan while you go through the refinance or home buying process. Mortgage rates can change daily or hourly, and if your interest rate is locked, your rate won’t change until closing (as long as you close within the specified time frame and there are no changes to your application).

Make sure your rate lock agreement is long enough to cover the time until you close on the loan. It can be expensive to extend the rate lock if you need more time. If you need to make changes to your mortgage application, including your loan amount, credit score or verified income, then your rate lock could change. A rate lock can also lock you out of a lower interest rate if rates drop after signing the agreement, unless your lender offers a float-down rate lock.

Float-Down Rate Lock

A float-down rate lock involves locking your rate but having the option to lower your rate under certain conditions. With a float-down rate lock, you don’t have to worry about rates increasing. If rates go down, then you can take advantage of the lower interest rate during the lock period.

A float-down rate lock comes with a fee that varies by lender. Also, borrowers are responsible for contacting the lender when rates fall and utilizing the float-down option.

Our friends at Rocket Mortgage^® offer RateShield^® which gives you the opportunity to lock during Verified Approval, when they check your credit, but also gather documentation on your income and assets. This is especially important to consider if you’re a home buyer because most rate locks can’t be done until you have a signed purchase agreement. With RateShield^®, you can protect your budget from the hit of higher rates while you’re still shopping and maybe even get a lower rate if things break the right way. RateShield^® lets you lock your rate for up to 90 days while shopping for a home. If rates fall at any time over that 90-day time frame, you can float down to a lower rate one time.

How Long Can You Lock In A Mortgage Rate?

Most rate locks are typically for 30, 45 or 60 days. Some lenders may even offer an extension to 90 or 120 days, depending on market conditions. However, you might be required to pay an extra fee for pushing back the rate lock expiration date, even if the initial rate lock period was free.

You don’t have to lock your rate at the time of your initial loan approval. You can lock your rate at any time between signing a purchase agreement – or earlier if your lender allows – and prior to closing the mortgage. How long you lock your rate influences how much you can expect to pay for the rate you’re getting.

There are several other factors that influence the rate itself, including how you plan to occupy your real estate along with your down payment or equity amount and the length of your loan term.

Should You Lock Your Mortgage Rate Today?

There are several situations in which a buyer or current homeowner may want to lock their mortgage rate.

The most important aspect of choosing when to lock your mortgage rate is ensuring it doesn’t expire before you close on your new home. After that, the perfect time to use a rate lock will depend on your personal situation and whether interest rates are predicted to fall or rise.

Typically, the earliest you can lock a rate on a refinance is right after completing your application. With a purchase, it’s going to depend on the type of rate lock offered by the lender.

When you should lock it depends on your personal tolerance for possible fluctuations. If you’re looking at predicted interest rates and think they might fall soon, you can choose to wait it out.

When Buying A House

There may or may not be conditions regarding when you can lock your rate during the home buying process, such as:

• Meeting specific contingencies
• Getting the house move-in ready
• Officially closing on the house
• Getting prequalified for a mortgage

When Refinancing Your Home

You can lock your rate during the early stages of a rate-term or cash-out refinance. However, there are different considerations that need to be addressed, such as whether the mortgage rate lock will help you get past the break-even point or whether a cash-out refinance can give you a lower mortgage rate.

If you’re doing a rate-term refinance, will you be in the house long enough to get past the break-even point where the money you save on the monthly payment outweighs what you pay in closing costs with that rate? Then consider locking your rate. If you’re doing a cash-out refinance, the goal is a little different and not about lowering your rate, but the key is to just take the lowest rate you can get.

How To Lock Your Mortgage Rate

If you’re ready to explore your rate lock options, the process is straightforward. You can lock your rate by speaking with a lender or working through their online portal. However, there are several steps that need to be completed to set you up for success:

• Make sure your credit score is in order. Before you apply, you can check your own credit score. If it needs work, then you’ll have time to resolve the issues and pay off debt before applying if you know what your situation is ahead of time.
• Ensure that you have enough money set aside for a down payment. Most mortgage lenders require a down payment of at least 3%. If you want to avoid paying private mortgage insurance (PMI), then you’ll need to make a down payment of at least 20%.
• Submit your application for a mortgage loan. When you’re ready, it’s time to apply with lenders. If it’s a refinance, you’ll have the option of locking right away. If it’s a purchase, it will depend on whether you found a house yet and what options the lender offers.
• Assess your Loan Estimate. Once your application is fully complete, your lender will send you a Loan Estimate with an assumed monthly payment based on a quoted interest rate.
• Lock the mortgage rate, or wait. You can choose to lock your rate and move forward with that lender or shop for better rates at other lenders. Or, you can choose to wait for rates to come down before moving ahead with the home buying or refinance process.

Mortgage Rate Lock FAQs

Here are the most frequently asked questions about a mortgage rate lock.

When is the latest you can lock a mortgage rate?

You can choose to lock your mortgage rate up to 5 days before closing. It’s best to lock your interest rate as soon as possible. If you think rates will drop, ask your lender if they can offer a float-down rate lock.

Can you back out of a mortgage rate lock?

You can’t unlock your rate after signing a mortgage rate lock agreement. A rate lock protects you if interest rates go up. If rates suddenly drop, a lender won’t offer you the lower interest rate unless you have a one-time float-down option.

Why do mortgage rates change over time?

There are many factors that cause mortgage rates to fluctuate over time. How mortgage rates are determined depends on the current state of the economy, the demand for housing, financial markets and decisions made by the Federal Reserve. Mortgage rates change daily and sometimes even hourly.

The Bottom Line: Mortgage Rate Lock Helps You Avoid Interest Rate Hikes

A mortgage rate lock involves holding your mortgage rate in place to prevent the rate from fluctuating higher while you’re waiting to close. If you’re risk averse, you might choose to lock earlier rather than later. If you think rates are going to come down, you might choose to wait longer.

Ready to apply for a mortgage? Rocket Mortgage will let you know the best time to lock your rate and save money.