A “mortgage rate lock” is essential to ensure you actually receive the interest rate you are quoted by a bank or mortgage broker.
When you purchase real estate or refinance an existing mortgage, you’ll need to lock in a mortgage interest rate at some point during the loan process. You can do this early on or later in the process, depending on your preference.
While comparing lenders, you’ll you be presented with a mortgage rate quote, but it will mean very little until it’s actually secured, or “locked,” by a bank or lender.
It’s kind of like a car dealer telling you a price over the phone, then you show up at the dealership and the price is a lot different for whatever reason. Until you have it in writing, it doesn’t mean much.
When you lock in a mortgage rate, you are guaranteed that interest rate, assuming your loan actually qualifies under said lender or bank’s guidelines. And as long as you close by the lock expiration date.
By locking your home loan, you secure a specific interest rate along with certain terms, including the mortgage index and margin the program is tied to, the prepayment penalty if any, and the initial, periodic, and lifetime caps.
Most lenders don’t charge a rate lock fee, but they’ll often ask for a deposit at the time you lock for the home appraisal as an indirect means of making sure you’re committed to the loan application. For example, if you lock with them but then decide to use a different lender, it would cost them, so they want some assurances.
Choosing a Mortgage Rate Lock Period
- 15 day
- 30 day
- 45 day
- 60 day
When you lock your loan, you must also choose a rate lock period, which can range from 7 days to 90 days or even longer. The most common lock term is anywhere from 15-45 calendar days, which is the average time it takes for a home loan to close.
For example, if you agree to a 15-day lock on December 6th, your lock will expire on December 21st. If you do a 30-day lock, it will expire on January 5th.
The longer the lock period, the worse the pricing will be, all else being equal, because it’s risky for a lender to offer a guaranteed rate over time.
While the mortgage rate may not be different based on the lock period, the closing costs will most likely vary. So you might find yourself paying more in closing costs for a 45-day lock vs. a 15-day lock.
It’s important to pick the appropriate length of time to ensure you get the loan closed (funded) before the lock expires, without subjecting yourself to additional fees.
Either way, you will always have the opportunity to extend your rate lock at a relatively small cost if the process gets delayed, which it often will!
When to Lock Your Mortgage
Some borrowers may choose to lock in a mortgage rate at the initial time of the loan application, before the loan is even submitted to the underwriting department. This is known as a “pre-lock,” and ensures the interest rate is set before the loan is even underwritten.
It can be helpful to pre-lock your mortgage rate if the debt-to-income ratio is close to the maximum, so if there are any interest rate fluctuations, the DTI won’t be exceeded. In may also be a smart move if mortgage rates are rock-bottom and there is little expectation for rates to improve further.
However, this option is typically only available on a refinance or for a purchase loan that has has a fully executed purchase contract. If you’re simply shopping for a home, a pre-lock probably won’t be an option.
Others may float their mortgage rate and lock their mortgage at the last minute, effectively gambling on the hopes of mortgage rates improving later in the loan process. If you feel mortgage rates have more room to fall, this could be the way to go. But as mentioned, it’s a gamble and there’s no guarantee.
You can typically lock your loan Monday through Friday during normal business hours, which tend to mirror market hours. Some lenders may allow a lock on a weekend, but the pricing will likely factor in the uncertainty of the week ahead.
Can Mortgage Rates Change Once Locked?
Nope. Once you lock in your rate, your rate cannot change as long as your loan funds before expiration.
For example, if you lock in a rate of 3.75% on a 30-year fixed mortgage and rates shoot up to 4.5% over the next week, you can give yourself a pat on the back.
Those who didn’t lock will have to contend with the higher rates, but you can rest assured that your rate won’t change.
However, it’s also possible for mortgage rates to drop after you locked. In this case, you might be perturbed, but again, your rate won’t change, or improve in this case, either.
In that sense, you’re taking a risk by locking on a certain day. For the record, there is no special day to lock, or a better day to lock than others. It’s like asking someone what the best day to buy stocks is. Plenty of opinions I’m sure, but no one knows for sure.
If you’re asking the cliche question, “Should I lock today?,” consider the following:
- Are you happy with the rate and fees being charged today?
- How much do you stand to gain if rates improve?
- How much time do you have before you must lock in order to comply with all lender timelines?
- Could a rate spike jeopardize your loan entirely?
- What’s the current rate trend? Is it your friend?
- Is any big economic or geopolitical news on the horizon?
- Do you like to take risks?
As a rule of thumb, the longer you have until the close of escrow, the more chances you have of mortgage rates improving. Conversely, if you only have a couple weeks before you close, you’re taking more of a risk by floating your rate.
Put simply, mortgage rates tend to rise and fall all the time, and if you have a longer period of time to float, there’s a better chance you’ll see a favorable day or two to lock in a great rate. This is why it may not make sense to lock well in advance.
For example, if you have a 45- or 60-day escrow, you’ve got a lot of time to watch rates and see how things go. It might be prudent to just take a wait and see approach, especially if mortgage rates jumped higher in recent days or weeks.
The ebb and flow might benefit you if a long period of rising rates suddenly reverses course.
It’s kind of like buying airline tickets. Imagine you’ve got three months before you trip. You have time to sit and watch fares to see if they come down. And even if they go up, they might come back down again.
If your flight is in two weeks, you don’t have that luxury, and could wind up with an even higher fare if you push it to the last minute.
Ultimately, it’s your choice and will be dictated on your risk appetite and/or if you’re satisfied with where rates are on a given day. Think it through and try not to be too impulsive. No one know with certainty if rates will go up or down tomorrow, next week, or next month.
What If My Rate Lock Expires Before Closing?
As mentioned, mortgage locks don’t last forever, they come with a set time period. Assuming you lock your rate in early on, there’s a chance the rate lock period could be exhausted, at which point the lock could expire.
If the rate expires before loan closing, you’ll need to get it re-locked. This could entail worst-case pricing (assuming mortgage rates have risen) and a relock fee. For example, if rates went down, you’d be stuck with your old, higher rate and a relock fee to boot.
Ask for a Rate Lock Extension
But typically the lender will keep an eye on the rate lock period and issue a “rate lock extension” before the lock actually expires. Doing so will ensure you get to keep the rate you originally signed up for.
However, rate lock extensions don’t come for free either. If it wasn’t the lender’s fault, the cost of the rate lock extension could run you several hundred dollars or more, depending on the associated loan amount.
It is calculated as a percentage of the loan amount. So you might be charged .125% for a 7-day lock extension, or .25% for a 15-day extension. These fees will vary from lender to lender and could be more or less.
The higher your loan amount, the higher the cost. On a $200,000 loan amount, you’d be looking at a cost of $250 or $500 to extend the lock period, respectively.
While that fee sounds like a raw deal, holding onto a rate that is an .125% or more lower could save you a lot of money over the term of the loan. In other words, it’s better to get the extension than let the lock expire for fear the rate could rise.
If the delay happens to be the lender’s fault, they will generally offer a free rate lock extension for seven days out of good faith. This should be enough to get the loan closed without any cost to you. Even if it is your fault, you might be able to get a few free days to ensure the loan closes before the lock expires.
In any case, you can try to negotiate a lock extension in your favor, and ask them to extend it for free if you feel it was out of your hands. They may work with you to retain your business and avoid you going elsewhere.
Rate Lock Break Option
Some lenders may give you the option to “break your lock” if rates substantially improve after you lock.
However, this option will come at a cost. For example, say you lock in a rate of 4.625% and rates all of a sudden fall to 4%. The lender may let you execute a rate lock break whereby you get a rate of 4.125% (an eighth over the prevailing market rate) at an additional cost in the way of discount points.
In other words, you’ll wind up with a lower rate than what you originally locked, but you won’t get quite the lowest rate currently available, nor will you get it for free. You’ll pay some fraction of a point to get it, perhaps a quarter or half a point.
Then once you break even on that initial upfront cost, you can save money via lower monthly mortgage payments year in and year out.
Get the Mortgage Lock in Writing
Either way, it’s important to stay on top of your mortgage rate lock, and to make sure you have the rate and terms in writing. Never just assume a mortgage broker or bank has locked your interest rate.
They may say your rate is this or that, or that it’s locked, but in actuality they may be floating your rate in the hopes of getting a better commission or yield spread premium. Or perhaps you’ve been misquoted, and they’re praying the mortgage rate will come down to what they originally quoted you.
I’ve seen that happen a million times. Brokers will go into panic mode if they failed to lock a rate initially, often after quoting their borrower a guaranteed rate. They’ll call the mortgage lender each day to see how mortgage rates have moved, and nervously push on day after day, waiting for the moment rates fall to the level they were initially quoted.
Sometimes brokers will settle for a lower rate with less commission to them, but often they’ll simply tell the borrower the rate is higher for some reason. And the borrower will just have to accept it because they’ve spent so much time working on the loan that they’ll just want to get it done.
Watch Out for Changes
Some loan officers and brokers may even change the original terms they quoted you to get a lower rate. Such as raising the margin, adding a prepayment penalty, or changing indexes, caps, or even loan programs.
All that said, make sure you know exactly what you’re getting when it comes to the interest rate and terms associated with your mortgage rate lock. Any mistakes here will lead to higher monthly mortgage payments for years to come, and a major headache if you fail to jump on a good rate early on.
Sure, you can gamble, but if you’re happy with a certain interest rate, might as well not take chances. And again, always get your lock confirmation in writing from the bank or broker before you proceed with the deal! This cannot be stressed enough!